To draw: A payoff graph depicting the strategy of given information. Introduction: Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Question

Assume that using the Security Market Line the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on the market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB).

Answer 1

Question

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

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Assume that using the Security Market Line the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on the market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB).

You have a portfolio that is equally invested in Stock F with a beta of 1.15, Stock G with a beta of 1.52, and the risk-free asset. What is the beta of your portfolio? How do I solve this?

When the required returns on all stocks are graphed against their corresponding betas, Question 16Answer a.we obtain the security market line b.No option is correct c.we obtain the beta d.we obtain the return line

Answer 2

Question

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

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Answer 3

Question

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

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Answer 4

Question

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

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Answer 5

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

Answer 6

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 7

Chapter 20, Problem 25PS

a.

Summary Introduction

To draw: A payoff graph depicting the strategy of given information.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 8

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

Answer 9

b.

Summary Introduction

To draw: A profit graph depicting the strategy of given information.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

Answer 10

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

Answer 11

c.

Summary Introduction

To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.

Introduction:

Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.

Answer 12

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Answer 23

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author explains that a payoff graph depicts the strategy of given information. The vertical and horizontal axes depict the profit/loss and the underlying stock price.

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