Under the assumptions of the Black-Scholes model, which value does not affect the price of a European call option a. interest rate R b. strike price K c. spot price S d. return of the stock U e. volatility of the stock O
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Under the assumptions of the Black-Scholes model, which value does not affect the
a. interest rate R
b. strike price K
c. spot price S
d. return of the stock U
e. volatility of the stock O
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- Orb Trust (Orb) has historically leaned towards a passive management style of its portfolios. The only model that Orb’s senior management has promoted in the past is the Capital Asset Pricing Model (CAPM). Now Orb’s management has asked one of its analysts, Kevin McCracken, CFA, toinvestigate the use of the Arbitrage Pricing Theory model (APT).McCracken has determined that a two-factor APT model is adequate where the factors are the sensitivity to changes in real GDP and changes in inflation. McCracken’s analysis has led him to the conclusion that the factor risk premium for real GDP is 8 percent while the factor risk premium for inflation is 2 percent. He estimates for Orb’s High Growth Fund that the sensitivities to these two factors are 1.25 and 1.5 respectively. Using his APT results, he computes the expected return of the fund. For comparison purposes, he then uses fundamental analysis to also computethe expected return of Orb’s High Growth Fund. McCracken finds that the two…According to the efficient markets hypothesis,a. excessive diversification can reduce an investor’sexpected portfolio returns.b. changes in stock prices are impossible to predictfrom public information.c. actively managed mutual funds should generatehigher returns than index funds.d. the stock market moves based on the changinganimal spirits of investorsAccording to the efficient markets hypothesis,a. changes in stock prices are impossible to predict from publicinformation.b. excessive diversification can reduce an investor's expected portfolioreturns.c. the stock market moves based on the changing animal spirits ofinvestors.d. actively managed mutual funds should give higher returns than indexfunds.
- Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = (x^n)/n . There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R1 with probability 1 − q and R0 with probability q. We assume R1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w−A is invested in the safe asset. What are risk preferences of this investor, are they risk-averse, risk- neutral or risk-loving? Find A as a function of w. Does the investor put more or less of his portfolio into the risky asset as his wealth increases?.Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = x^n/n . There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R1 with probability 1 − q and R0 with probability q. We assume R1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A is invested in the safe asset. 1. What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving? 2. Find A as a function of w. 3. Does the investor put more or less of his portfolio into the risky asset as his wealth increases? 4. Now find the share of wealth, α, invested in the risky asset. How does α change with wealth? 5. Calculate relative risk aversion for this investor. How does relative risk aversion depend on wealth?Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = X^n/n . There is a safe asset (such as a US government bond) that has a net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R1 with probability 1 − q and R0 with probability q. We assume R1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w−A is invested in the safe asset. Now find the share of wealth, α, invested in the risky asset. How does α change with wealth?
- The weak form of the efficient market hypothesis implies that: No one can achieve abnormal returns using market information. Insiders, such as specialists and corporate board members, cannot achieve abnormal returns on average. Investors cannot achieve abnormal returns, on average, using technical analysis, after adjusting for transaction costs and taxes. All of above.Which of the following is a true statement? a. In a bubble, the price of the asset is the expected present value of its future returns. b. The overall real value of the stock market may fluctuate significantly over a year. c. The higher the one-year interest rate, the higher the present discounted value of a payment next year. d. The yield curve normally slopes down.In financial economics, __________ is a concept that refers to the reduction in investment risk that can be achieved by combining various financial assets in a portfolio. It is a fundamental element of modern portfolio theory. A) DiversificationB) ArbitrageC) LeverageD) Speculation
- Jane, who works for the economic research department in a multinational corporation, is preparing a report for the advisory board of the company. The report intends to clarify in which country they should invest given the expected change in demand. The objective is, of course, to identify the country with greater change in demand. Jane analyzes countries A and B that currently have the same demand. She calculates the partial derivatives of demand with respect to income and finds that for country A it is greater than for country B. Demand in country A is measured in pounds and in country B in Kg. Can we conclude that if the only change expected in both countries is a change in income of 3.5%, then the company should invest in country A? no, we should calculate instead the income elasticity for the consumption of the good the company sells in each country. There is no statistic that can illuminate the advisory board on this problem. yes, because the derivative tells us that for each…Portfolios A, B, and C all lie on the efficient frontier that allows for risk-free borrowing and lending. Portfolio A and B have the following expected returns and return variances: A: μ_A=0.0925 , σ_A^2=0.0225 ; B: μ_B=0.11 , σ_B^2=0.04. Portfolio C’s return has variance σ_C^2=0.1225. What is the expected return and Sharpe ratio of Portfolio C? What is the risk-free interest rate? Explain your calculationsIn relation to the efficient markets hypothesis, consider the following observations: I. Mutual fund managers do not on average make superior returns. II. It is not possible to make superior returns by buying or selling stocks after the announcement of an abnormal rise in earnings. III. Managers who trade in their own stocks make superior returns. IV. In any year approximately 50 percent of all pension funds outperform the market. Which of the following statements is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Both I and II provide evidence against the strong form of market efficiency a b. Il provides evidence against semi-strong form efficiency, but not against strong form efficiency. IIl provides evidence against strong form efficiency, but not against semi-strong form efficiency. d IV provides evidence against semi-strong form efficiency, but not against strong form efficiency. e Both I and II provide evidence against…
