EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 26, Problem 7P
Summary Introduction
To calculate: The value of option using Black Scholes model.
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Students have asked these similar questions
Question 5. You can invest in two risky assets, rị and r, and one risk-free asset, rf . The two
risky assets are uncorrelated, and values are E[r] = 8%, E[r2] = 6%, Var[r] = 10%,Var[r2] = 3%,
and rf = 3%
If you have a mean-variance optimizer with a risk aversion A = 2, what is the optimal portfolio?
Assume you are risk-averse and have the following three choices.
Standard
Deviation
Project
A
B
C
Expected
Value
$ 2,520
2,930
2,480
$ 1,420
1,050
1,040
a. Compute the coefficient of variation for each.
Note: Round your answers to 3 decimal places.
Project
A
B
C
Coefficient of
Variation
b. Which project will you select?
O Project C
O Project A
O Project B
2. There are two projects, X and Y. the following probability distribution for the projects are
given below
PROJECT X
PROJECT Y
Return
Prob.
Return
Prob.
Pessimistic
8%
0.25
7%
0.35
Most Likely
16
0.50
13
0.45
Optimistic
21
0.25
22
0.20
Which project should you take based on Risk and Return?why?
Chapter 26 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
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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
- APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?arrow_forward5. There are three risky assets with rates of return r₁, 12, and r3, respectively. The covariance matrix and the expected rates of return are [0.4 0.2 0 = Σ 0.2 0.4 0.2 0 0.2 0.4 [0.04] 0.08 0.06 (a) Find the global minimum-variance portfolio. (b) For the required return z = 0.075, find (the weight of) the optimal portfolio with risky assets. For (c) and (d) only, assume there is an additional risk-free asset with return Tf 0.03. = (c) Find the tangent portfolio.arrow_forwardAnalyze investment M and investment J using the below. Scenario Probability M Return J Return Strong .30 18% 20% Normal .30 15% 12% Weak .40 9% 5% 1. What is the range for M? 2. What is the average exp. return for M ? 3. What is the standard deviation* M? 3.85 (given) 4. What is the CV for M? 5. What is the range for J? 6. What is the average exp. return for J? 7. What is the standard deviation J? 6.22 (given) 8. What is the CV for J? 9. Which is the better choice?arrow_forward
- Please answer all questionsarrow_forwardAlternatives X and Y have rates of return of 10% and 18%, respectively. What is known about the rate of return on the increment between X and Y if the investment required in Y is (a) larger than that required for X, and (b) smaller than that required for X? (c) Develop two spreadsheet examples that illustrate your responses to parts (a) and (b).arrow_forwardGiven an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL? A. 0.64 B. 0.14 C. 0.33 D. 0.62 E. 0.54arrow_forward
- Use the required return-beta equation from the CAPM What is the required return if the risk-free rate is 4%, beta 1.5 and the expected market return 8%? What is the risk-free rate if beta is 1.1, the required return 8.4% and the expected market return 8%? What is beta if the risk-free rate is 4%, the required return 12% and the expected market return 8%? What is the expected market return if the risk-free rate is 4%, beta 1.5 and the required return 12%?arrow_forward10) Given an optimal risky portfolio with expected return of 15%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL? A) 0.64 B) 0.27 C) 0.08 D) 0.38 E) 0.36 Provide explanation for the correct answer.arrow_forwardSame setup as question 4. The book talks about finding the return of the minimum variance portfolio (MVP) using this template. What is that value for this setup? I.e., what is the return on the MVP under the assumptions of Question 4? About 7.519 About 8.32% About 9.28% About 6.80%arrow_forward
- - Exercise 2 An investor who maximizes a linear mean-variance utility, U(µp, σp) μpaσ, optimally invests half of her wealth in asset 1, having expected re- turn μ₁ = 10% and standard deviation σ1 10%, and half of her wealth in a risk-free asset, having return FR = 4%. = (a) Find the efficient frontier and represent it in the plane (σp, μP) (assuming that the investor feasible portfolios can include a short position in the risk- free asset). (b) Find the risk-aversion parameter a of the investor. (c) Using the same efficient frontier, for which levels of risk-aversion parameter the investor has a negative position in the risk-free asset? =arrow_forwardCalculate the expected return for an investment with the following probability distribution. Return (%) Probability (%) -10 20 5 20 10 20 17 30 26 10arrow_forward4arrow_forward
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