Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 20, Problem 23P
You are watching the option quotes for your favorite stock, when suddenly there is a news announcement. Explain what type of news would lead to the following effects:
- a. Call prices increase, and put prices fall.
- b. Call prices fall, and put prices increase.
- c. Both call and put prices increase.
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Consider the two stocks below. Which has a positive beta (i.e., tends to
move in the same direction as the market)? Which has a higher R2 (1.e.,
market returns explain more of its return patterns)?
Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.
Stock 1 has a positive beta and a higher R²
a
b
C
d
Stock 2 has a positive beta and a higher R²
Stock 1 has a positive beta, but Stock 2 has a higher R
Stock 2 has a positive beta, but Stock 1 has a higher R²
ft
RM
Stock 2
Stock 1
Par
A “random walk” occurs when:a. Stock price changes are random but predictable.b. Stock prices respond slowly to both new and old information.c. Future price changes are uncorrelated with past price changes.d. Past information is useful in predicting future prices.
please answer both. If a stock's fair return increases, what will happen to the stock's value?
A.
It will increase.
B.
It will not change.
C.
It will decrease.
If the market risk premium rises, what will happen to the stock's price?
A.
It will not change.
B.
It will increase.
C.
It will decrease.
Chapter 20 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 20.1 - What is the difference between an American option...Ch. 20.1 - Does the holder of an option have to exercise it?Ch. 20.1 - Prob. 3CCCh. 20.2 - What is a straddle?Ch. 20.2 - Explain how you can use put options to create...Ch. 20.3 - Explain put-call parity.Ch. 20.3 - If a put option trades at a higher price from the...Ch. 20.4 - What is the intrinsic value of an option?Ch. 20.4 - Can a European option with a later exercise date...Ch. 20.4 - How does the volatility of a stock affect the...
Ch. 20.5 - Is it ever optimal to exercise an American call on...Ch. 20.5 - When might it be optimal to exercise an American...Ch. 20.5 - Prob. 3CCCh. 20.6 - Explain how equity can be viewed as a call option...Ch. 20.6 - Explain how debt can be viewed as an option...Ch. 20 - Explain the meanings of the following financial...Ch. 20 - What is the difference between a European option...Ch. 20 - Below is an option quote on IBM from the CBOE Web...Ch. 20 - Prob. 4PCh. 20 - Prob. 5PCh. 20 - You own a call option on Intuit stock with a...Ch. 20 - Assume that you have shorted the call option in...Ch. 20 - You own a put option on Ford stock with a strike...Ch. 20 - Assume that you have shorted the put option in...Ch. 20 - What position has more downside exposure: a short...Ch. 20 - Consider the October 2015 IBM call and put options...Ch. 20 - You are long both a call and a put on the same...Ch. 20 - You are long two calls on the same share of stock...Ch. 20 - A forward contract is a contract to purchase an...Ch. 20 - You own a share of Costco stock. You are worried...Ch. 20 - Dynamic Energy Systems stock is currently trading...Ch. 20 - You happen to be checking the newspaper and notice...Ch. 20 - In mid-February 2016, European-style options on...Ch. 20 - Suppose Amazon stock is trading for 500 per share,...Ch. 20 - Consider the data for IBM options in Problem 3....Ch. 20 - You are watching the option quotes for your...Ch. 20 - Explain why an American call option on a...Ch. 20 - Consider an American put option on XAL stock with...Ch. 20 - The stock of Harford Inc. is about to pay a 0.30...Ch. 20 - Suppose the SP 500 is at 900, and a one-year...Ch. 20 - Suppose the SP 500 is at 900, and it will pay a...Ch. 20 - Prob. 29PCh. 20 - Suppose that in July 2009, Google were to issue 96...
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- If you observe open interest is increasing and prices are moving higher, which of the following would be the most likely explanation? A. New short positions are entering the market B. Old short positions are exiting the market C. New long positions are entering the market D. Old long positions are exiting the marketarrow_forwardAnswer the following questions: A. Explain why the price of many individual stocks still goes down, even when the overall stock market goes up. b. How can you avoid the value of your stock from going down?arrow_forwardUse an internet search or a generative Al site to answer the following questions. Be sure to cite your sources. You must post then comment on someone else's post. 1. What does it mean to have a long position in a stock? 2. What does it mean to have a short position in a stock? 3. Why is a short position risky? 4. Which kind of trade is sure to execute limit order or market order and why?arrow_forward
- Which of the following does NOT correctly complete this sentence: In general, the link between an information announcement and the stock price is that Select one: O a. the stock price will not change if the announcement provided only anticipated information. O b. if markets are efficient in the semi-strong form, then the market will react rapidly to the new information. O c. the expected stock return will change if the announcement contains a surprise component. O d. in order for the price of the stock to change, the announcement must be relevant to that particular stock and must be unanticipated. O e. only announcements that have already been discounted will affect the stock price.arrow_forwardAssume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.arrow_forwardIn the event of unexpected news announcement, such as a significant reduction in profit expectations, which of the following is NOT a likely stock price reaction?: Select one: a. The price instantaneously adjusts to the new information. b. No reaction, since the market has already learned to "expect the unexpected" The price over-adjusts to the new information, but eventually falls to the appropriate price. d. The price partially adjusts to the new information.arrow_forward
- If the intrinsic value of a stock is below the current market price, over time we can expect buy orders to exceed sell orders, causing the price to rise buy and sell orders to be evenly matched, keeping the price at its current level sell orders to exceed buy orders, causing the price to rise sell orders to exceed buy orders, causing the price to fall buy orders to exceed sell orders, causing the price to fallarrow_forwardAccording to the efficient market theory, whenever investors find that the required return of stock is less than the expected return of the stock, the investor will buy the stock. This will: a. drive the price up b. cause the market to crash c. drive the price down d. not affect the pricearrow_forwardAn arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called Select one: a. smart money. Ob. short sales. Oc. behavioral finance. Od. random walk.arrow_forward
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