The cc risk free rate r = -0.15% (yes, r ≤ 0). The spot price for TFS is So = 42.50, the cc dividend rate is 8%, and the annual volatility σ = 30%. Using our standard model for a 2 step tree, what is the replicating portfolio at the node t = 0, S = So for a 45 strike call option expiring in 6 months? A = B =
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- What is the expected return of a portfolio that has $8,000 invested in S and $2,000 invested in T? The risk-free rate is 6% and the market portfolio's return is 14%. Do you expect the investment to be a good one for the coming year if betas for the two portfolio components are 0.6 and 1.3, respectively?The risk free rate is 2% per annum. The market portfolio has an annual mean return of 14% and an annual return standard deviation is 26%. a.) A more cautious investor wishes to invest in another stock as he likes the low annual return standard deviation of 20%. This stock has an expected return of 7%. Construct for this investor a portfolio with the same return deviation but higher expected return, telling him what weights to employ and the return that he would expect. b.) Write down and interpret the CAPM equation that holds in this setting.Assume the riskless rate of interest is 2% per year, and the expected rate of return on the market portfolio is 8% per year. According to the CAPM, what is the efficient way for an investor to achieve an expected rate of return of 5% per year? If the standard deviation of the rate of return on the market portfolio is 4%, what is the standard deviation of the portfolio producing the 5% expected return? • Plot the CML and locate the foregoing portfolios on the same graph. • Plot the SML and locate the foregoing portfolios on the same graph.
- Based on current dividend yields and expected capital gains, the expected rates or return on portfolios A and B are 12% and 18%, respectively. The beta of A is 0.7 while that of B is 1.6. The T-bill rate is currently 4% while the expected rate of return of the S&P500 Index is 13%. The standard deviation of portfolio A is 14% annually, while that of B is 26%, and that of the index is 15%. If instead you could invest only in bills and one of these porfolios, which would you choose? Use the sharpe ratio to make your desicion.Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is 0.8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. a. If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain.b. If instead you could invest only in bills and one of these portfolios, which would you choose?Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time toexpiration is 4 months, (4) annualized risk-free rate is 5%, and (5) varianceof stock return is 0.25.
- Suppose that the SP 500 index has an expected return of 7% and a standard deviation of returns of 15%. The risk-free rate is 5%. The portfolio on the Capital Allocation Line (CAL) that has an expected return of 20% invests weight 65% in the SP 500. Answer if true or false, and show all your calculations.The rate on six-month T-bills is currently 5%. Andvark Company stock has a beta 0f 1.69 and a required rate of return of 15.4%.a. According to CAPM, determine the return on the market portfolio, km. b. Is this a risky or not risky stock? Explain.Currently the risk-free return is 3 percent and the market risk premium is 8 percent. What is the required rate of return on the following two-stock portfolio? Amount Invested Beta $70,000 1.4 $30,000 0.4
- Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) = ???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)The Treasury bill rate is 4.9%, and the expected return on the market portfolio is 11.1%. Use the capital asset pricing model. What is the risk premium on the market? (Enter your answer as a percent rounded to 1 decimal place.) What is the required return on an investment with a beta of 1.2? (Enter your answer as a percent rounded to 2 decimal places.) If an investment with a beta of 0.46 offers an expected return of 8.7%, does it have a positive NPV? If the market expects a return of 12.2% from stock X, what is its beta? (Round your answer to 2 decimal places.)