Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 21, Problem 31PS
Summary Introduction
(A)
Adequate information:
a. Choice A: $100,000 invested in calls with X 50.
Choice B: $100,000 invested in EFG stock.
b. Choice A: 10 call options contracts (for 100 shares each), with X= 50.
Choice B 1,000 shares of EFG stock.
To Compute:
To determine whether to choose choice A or choice B by using the given information.
Introduction:
The options to choose is calculated using the below values.
Summary Introduction
(B)
Adequate information:
a. Choice A: $100,000 invested in calls with X 50.
Choice B: $100,000 invested in EFG stock.
b. Choice A: 10 call options contracts (for 100 shares each), with X= 50.
Choice B 1,000 shares of EFG stock.
To Compute:
To determine whether to choose choice A or choice B by using the given information.
Introduction:
The options to choose is calculated using the below values.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Question:
You are an investment advisor. You currently own two stocks, A and B, with the following characteristics:
Expected Return
Beta
X
10%
0.8
Y
16%
1.5
The current risk-free rate is 2 percent, and the expected return on the market is 12 percent. How would you change your holdings of the two stocks (i.e., for each, would you sell or buy more)? Show your calculations (and explain).
Stock A:
Stock B:
Give typing answer with explanation and conclusion
can you do the question b please
Chapter 21 Solutions
Investments
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
Ch. 21 - Prob. 11PSCh. 21 - Prob. 12PSCh. 21 - Prob. 13PSCh. 21 - Prob. 14PSCh. 21 - Prob. 15PSCh. 21 - Prob. 16PSCh. 21 - Prob. 17PSCh. 21 - Prob. 18PSCh. 21 - Prob. 19PSCh. 21 - Prob. 20PSCh. 21 - Prob. 21PSCh. 21 - Prob. 22PSCh. 21 - Prob. 23PSCh. 21 - Prob. 24PSCh. 21 - Prob. 25PSCh. 21 - Prob. 26PSCh. 21 - Prob. 27PSCh. 21 - Prob. 28PSCh. 21 - Prob. 29PSCh. 21 - Prob. 30PSCh. 21 - Prob. 31PSCh. 21 - Prob. 32PSCh. 21 - Prob. 33PSCh. 21 - Prob. 34PSCh. 21 - Prob. 35PSCh. 21 - Prob. 36PSCh. 21 - Prob. 37PSCh. 21 - Prob. 38PSCh. 21 - Prob. 39PSCh. 21 - Prob. 40PSCh. 21 - Prob. 41PSCh. 21 - Prob. 42PSCh. 21 - Prob. 43PSCh. 21 - Prob. 44PSCh. 21 - Prob. 45PSCh. 21 - Prob. 46PSCh. 21 - Prob. 47PSCh. 21 - Prob. 48PSCh. 21 - Prob. 49PSCh. 21 - Prob. 50PSCh. 21 - Prob. 51PSCh. 21 - Prob. 52PSCh. 21 - Prob. 53PSCh. 21 - Prob. 1CPCh. 21 - Prob. 2CPCh. 21 - Prob. 3CPCh. 21 - Prob. 4CPCh. 21 - Prob. 5CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You have a portfolio of options on the same underlying as follows. Each option controls 100 shares. Long 1 call ∆ ±0.5 Short 5 calls ∆ ±0.8 Short 2 puts ∆ ±0.4 a) How many shares would you need to buy or sell to get your portfolio delta neutral?arrow_forward5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30 and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock Strategy 1 (stock): $25 $30 $32 $40 Stock price (S) in the market Profit from strategy 1 $35 $45 a) Would you buy or sell stocks? b) How many stocks would you buy or sell? c) How will you make money? Strategy 2 (option): $20 $25 $30 $32 $35 $40 $45 Stock price (S-) in the market Option value (Pay off) Premium Profit from strategy 2 a) Would you buy or sell call options? b) How many call options would you buy or sell? c) How will youmake money?arrow_forwardCould you help me with question c) please?arrow_forward
- Assume that you’ve just inherited $500,000 and have decided to invest a big chunk of it ($350,000, to be exact) in common stocks. Your objective is to build up as much capital as you can over the next 15 to 20 years, and you’re willing to tolerate a “good deal’’ of risk. What types of stocks (blue chips, income stocks, and so on) do you think you’d be most interested in, and why? Select at least three types of stocks and briefly explain the rationale for selecting each. Would your selections change if you were dealing with a smaller amount of money—say, only $50,000? What if you were a more risk-averse investor?arrow_forwardConsider a two-state outcome for the following problem: Winterhold Publishing House Current Stock Price $25.00 Exercise Price $27.00 Risk-free Rate 0.05 Share Price, High $30.00 Share Price, Low $20.00 Required: Using the data above, please find the hedge ratio. You currently own several shares of this company. The purchase puts according to the Hedge ratio to construct a non-random portfolio. Show the payoff for both outcomes, then solve for present value and the price of the put.arrow_forwardSuppose that put options on a stock with strike prices $30 and $35 cost $4 and $7, respectively. What is the profit of a bull spread when stock price at maturity is above $35? Select one: a. -3 b. 0 C. 32 d. 2 e. 3 €arrow_forward
- A protective put is a strategy in which the losses are limited on the bearish side, and the profits are unlimited on the bullish side. Create an excel spreadsheet to keep track of your profit\loss at various stock prices Assume you have a portfolio of 100 shares and you were afraid that the price will go down, thus, you have purchased a June put option with exercise price X=125, Assume that the current stock price is 125.94.arrow_forwarda. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph. Stock Beta E(Ri) U 0.85 N 1.25 D -0.2 b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U 22 24 0.75 N 48 51 2 D 37 40 1.25 Plot your estimated returns on the graph from part (a) and indicate what actions you would take with regard to these stocks. Explain your decisions.arrow_forward1. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected (required) return for the following stocks, and plot them on an SML graph. (10 marks) Stock Beta E (RA) .20 U 0.85 N 1.25 D -0.20 2. You ask a stockbroker what the firm's research department expects for the three stocks in Question 1 above. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U ZD 22 24 0.75 N 48 51 2.00 37 40 1.25 Plot your estimated returns on the graph from question 1 and indicate what actions you would take with regard to these stocks. Discuss your decisions.arrow_forward
- The rate of return on the market stock index is 13 percent. The rate of return on a risk-freebank account is 1%. The B (beta) of stock XYZ is 1.5. Use the data to answer the questionsbelow.a. What is the market risk premium? Show your work.b. What is the cost of equity for XYZ? Show your work.c. What is the stock XYZ risk premium? Show your work.d. Draw the graph of the Security Market Line and show the stock of XYZ on the graph.The end-of-year dividend on stock ABC is expected to be $0.8. The growth rate of dividend isexpected to be 5 percent for ever. The current price of the ABC stock is $10. Use the data toanswer the questions below.e. What is the cost of equity for stock ABC? Show your work.f. Suppose stock KLM has the same end-of-year dividend, dividend growth rate andprice as stock ABC, but the risk of KLM stock is much greater than of the ABC stock.What is your estimate of the cost of equity of stock KLM using the method at part e?Do you agree with the valuation of the cost of…arrow_forwardYou are holding call options on a stock. The stock’s beta is 0.65, and you are concerned that the stock market is about to fall. The stock is currently selling for $10 and you hold 1 million options (i.e., you hold 10,000 contracts for 100 shares each). The option delta is 0.70. How much of the market-index portfolio must you buy or sell to hedge your market exposure? Note: Enter your answer in dollar not in millions.arrow_forwardYou are trying to decide whether to invest in one or both of two different stocks. The marketrisk premium and risk-free rate are 6 percent and 4 percent respectively.Beta Expected Return(%)Stock 1 beta 0.8 % expected return7.0Stock 2 beta 1.2 %expected return 9.5Use your knowledge of the CAPM and the SML which and determinewhether you should invest in either, one, or both of these stocks. Provide all workingsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY