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.