Suppose the financial institution is trying to minimise their exposure to changes in the underlying asset price. Explain why the financial institution may want to keep their portfolio both Delta and Gamma neutral
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Suppose the financial institution is trying to minimise their exposure to changes in the underlying asset price. Explain why the financial institution may want to keep their portfolio both Delta and Gamma neutral
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- You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
- . The Capital asset Pricing Model (CAPM) contends that there is systematic & unsystematic risk for an individual security. Which is the relevant risk variable & why it’s relevant?The recent financial crisis clearly depicted a positive correlation between asset prices and, as a result, could warrant consideration for optimal portfolio strategies. Why would an investor prefer a constrained portfolio optimization approach?Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.
- The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?In your view, what is the most important prediction of the Capital Asset Pricing Model? Among the assumptions made in the CAPM, which one do you think is the most unrealistic, and why?When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a security classified as HTM? Would your answer change if the drop in fair value was due to worsened financial conditions at the investee?
- In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. the level of the security market line the slope of the security market line the difference between the beta and the risk-free rate the risk-free rateIn order to benefit from diversification, the returns on assets in a portfolio must: Answer a. Not be perfectly positively correlated b. Have the same idiosyncratic risks c. Be perfectly positively correlated d. Be perfectly negatively correlatedIn contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.
