EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 1PS
Summary Introduction
To explain: Compare the stock‘s beta value and bond duration to hedge the risk and the difference in calculating a hedge position in each market.
Introduction: To hedge the risk both tools are used. But there is calculation difference, beta value is given by the market index value and bond value is given by the dollar value’s change. Bond duration is the maturity period of the bond or investment.
Expert Solution & Answer
Answer to Problem 1PS
Beta value is evaluated by index value whereas bond value is calculated by the change in dollar value.
Explanation of Solution
The beta value and bond duration are used to hedge the market risk without affecting the performance of portfolio. These tools provide to compute the gain and loss of the portfolio. The change percentage value used to compute the dollar change value. By using dollar value hedge ratio is calculated. The beta value is calculated with respect to the market index and that change is calculated for the specified market index. If beta value is positive then there is reduction in market portfolio. Here, investors face a loss those have a long position in market.
Bond duration calculation differs from the beta value. Bond value is calculated by the change of dollar value to the portfolio with respect to the future contracts. The value change in dollar gives the hedge ratio of the portfolio.
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A company currently pays a dividend of $3.6 per share (D0 = $3.6). It is estimated that the company's dividend will grow at a rate of 19% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.4, the risk-free rate is 8.5%, and the market risk premium is 4.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
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A company currently pays a dividend of $3.6 per share (D0 = $3.6). It is estimated that the company's dividend will grow at a rate of 19% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.4, the risk-free rate is 8.5%, and the market risk premium is 4.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
Chapter 23 Solutions
EBK INVESTMENTS
Ch. 23 - Prob. 1PSCh. 23 - Prob. 2PSCh. 23 - Prob. 3PSCh. 23 - Prob. 4PSCh. 23 - Prob. 5PSCh. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Prob. 8PSCh. 23 - Prob. 9PSCh. 23 - Prob. 10PS
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