Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 21, Problem 3PS
Summary Introduction
To think critically about:
The relationship between income yield and interest rate is to be explained. The impact of interest rate and income yield over the time-spread is to be determined.
Introduction:
Time spread is the hedging technique. It involves simultaneously buying and selling the contract of same underlying stock at similar price with different maturity period. It means investor is purchasing a contract of long- maturity and selling the contract of short- maturity.
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Students have asked these similar questions
All else equal, is a call option on a stock with a lot of firm-specific risk worth more than one on a stock with little firm-specific risk? The betas of the two stocks are equal.
If you compare two stocks which have identical firm-specific risk. However, one of these options has a high beta, while the other has a low beta. The value of a put option on the high beta stock is ________ compared to the low beta stock.
higher
lower
the same
more information is needed
Under which of the following circumstances would you want to buy a stock?
Select one:
a.
The HPR is greater than zero.
b.
A stock's holding period return is greater than the CAPM return
c.
A stock's CAPM return is greater than its holding period return
d.
The stock's price is higher than its value
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
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- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forwardWhat is Put-Call Parity (select the best answer)? Group of answer choices Put-Call Parity suggests that puts and calls have equal, but opposite, values. Uses arbitrage arguments showing that a portfolio of the underlying stock plus a put has the exact same payoffs as a portfolio of a risk-free bond plus a call. Thus, those two portfolios must have equal value. Uses arbitrage arguments to show that the value of a Put is equal to the value of a Call plus the Stock Price. Uses arbitrage arguments to show that the value of a Call is equal to the value of the underlying stock plus the value of a Put.arrow_forwardIn a binomial tree created to value an option on a stock, what is the expected return on the option? O Zero O The return required by the market O The risk-free rate O It depends on the volatility ALarrow_forward
- What is a stock's alpha? Group of answer choices The amount you expect to earn on a security relative to some appropriate "benchmark" that appropriately reflects the risk of that investment In a CAPM world, if a stock is on the security market line, it's alpha is zero If you earn a return on security greater than the market overall, then you generated positive alpha In a CAPM world, you invest in a stock that has a Beta of 1. If you earn a return greater than the market, then you generated positive alpha In a CAPM world, you invest in a stock that has a Beta of 2. If you earn a return greater than the market, then you generated positive alphaarrow_forwardWhich of the following statements is CORRECT? a. Lower beta stocks have higher required returns. b. A stock's beta indicates its diversifiable risk. c. Diversifiable risk cannot be completely diversified away. d. Two securities with the same stand-alone risk must have the same betas. e. The slope of the security market line is equal to the market risk premium.arrow_forwardIf a stock has a higher volatility, would your broker would want to set the maintenance margin percent higher or lower?arrow_forward
- Explain why both put and call options are worth more if the stockreturn standard deviation is higher but put and call options areaffected oppositely by the stock price.arrow_forward1. What are beta measures? (a) The volatility of the security (b) The joint volatility of any two securities in a portfolio (c) The volatility of a security divided by the volatility of the market index (d) The relative co-movement of a security with the market portfolio 2. Which of the following statements about a stock's beta is true? I. A beta greater than one is riskier than the market II. A beta less than one is less risky than the market III. A beta less than one is risk-free IV. A beta less than one is undervalued (a) Statement I alone (b) Statement III alone (c) Statements I and III (d) Statements I and IIarrow_forwardThe security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: Required return on Stock = Risk-free return + (Market risk premium) (Stock's beta) If a stock's expected return plots on or above the SML, then the stock's return is sufficient ✓to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the…arrow_forward
- Is it possible to construct a portfolio of real-world stocks that has a required return equalto the risk-free rate? Explain.arrow_forwardThe greater the volatility of the underlying stock, the higher; lower lower; higher higher; higher lower; lower the call option premium and the the put option premium.arrow_forwardStock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.) a. Stock B must be a more desirable addition to a portfolio than A. b. Stock A must be a more desirable addition to a portfolio than B. c. The expected return on Stock A should be greater than that on B. d. The expected return on Stock B should be greater than that on A. e. When held in isolation, Stock A has more risk than Stock B.arrow_forward
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