Chapter 11, Problem 1BIC

To hedge, a user of an energy resource wants price protection from rising prices. The user decides to buy a call option to protect against rising prices. But they want a lower cost of hedging and decide to construct a collar strategy.  What other action should they take along with the purchase of the call option? Buy a call option Sell a call option Buy a put option Sell a put option None of the above

Which two statements about robo-advisors are true?a) They are programmed with the input of humans who are expert in the field b) They involve selecting from predetermined investment funds without involving a humanfinancial advisorc) They use an online smart system that asks preprogrammed questionsd) They involve mirroring a general investment fund’s return on the markete) They involve sitting down with an investment advisor who will ask questions about your risktolerance and your investment horizon

An analyst wanting to assess the downside risk of an alternative investment and is considering the Sortino ratio, value at risk (VaR) and standard deviation of returns. Which of these would be appropriate and why? Explain why one or more of the options above are correct and explain why, if any of the remaining options are incorrect.

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?

Use the following to answer questions a. – f.       a. What is the alpha for Fund B? b. Based on alpha, which fund displays superior performance? c. What is the Sharpe ratio for Fund B? d. Based on the Sharpe ratio, which fund displays superior performance? e. Suppose you are an investment counselor with a new client, Jonsey, and that Funds A and B are the only options available in Jonsey's company sponsored retirement account. Jonsey has no other investments. Which fund would you recommend, and why? f. What additional evidence would make you more confident in your recommendation, that is, more confident that the fund you recommend has the ability to perform in the future? (Hint: The answer has nothing to do with the Treynor Index.)

Investment in any of the alternatives depends on the needs and requirements of the investor. What are those avenues (alternatives)?

Let A and B be two risky assets. If you choose A, you will get 64TL by 30% chance, or 1TL by 70% chance. If you choose B, you will get 25TL by 40% chance or 9TL by 60% chance. First assume that you make a choice without making any detailed research or getting any consultancy. Draw a decision tree representing this situation and find the optimal investment decision for a risk neutral agent. What would be the choice of a risk averse agent between the two investment options? Explain (you can assume a representative utility function for the agent).

IF YOU WILL INVEST IN ONE OF THE INVESTMENT OPTIONS, WHAT WOULD IT BE AND WHY? ELABORATE YOUR ANSWER

This is an open ended question and you need to do some research to get the answers: Is arbitrage good or bad? Justify. What are some problems with the Black-Scholes-Merton model? Suggest some improvements of the Black-Scholes-Merton model. In the class, we have derived the Black-Scholes-Merton formula for European options. Is is possible to derive something similar for American options?