You are a financial advisor and one of your customers tells you that, according to her, Company A is a successful Norwegian firm listed in the OSEAX index and undervalued in the market. She estimates that it has a CAPM alpha of 3% and a CAPM beta of 1.25. The risk-free rate is 1%. Due to her macroeconomic predictions, your client expects a decline in the Norwegian stock market index OSEAX, and she would like to still invest 20 million NOK in stock A while, at the same time, not being exposed to the market. You are asked to suggest and implement a trading strategy that achieves this goal. The OSEAX index currently sits at 1,250 points, and the multiplier for its futures contracts on the Norwegian stock exchange is 500 NOK. a. Without doing any computation, what level of average return can your client expect to receive if she implements your suggested strategy? Why? b. Without doing any computation, will your client be able to hedge all risks with this strategy? C. Perform this strategy, showing all the steps. Derive the equation of the final value of your dient's portfolio in the next period, assuming that from the current period to the next period no dividends are paid.
You are a financial advisor and one of your customers tells you that, according to her, Company A is a successful Norwegian firm listed in the OSEAX index and undervalued in the market. She estimates that it has a
a. Without doing any computation, what level of average return can your client expect to receive if she implements your suggested strategy? Why?
b. Without doing any computation, will your client be able to hedge all risks with this strategy?
C. Perform this strategy, showing all the steps. Derive the equation of the final value of your dient's portfolio in the next period, assuming that from the current period to the next period no dividends are paid.
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