Bundle: Fundamentals of Financial Management, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
15th Edition
ISBN: 9781337817417
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 18, Problem 4P
Intermediate Problems 4-5
BLACK-SCHOLES MODEL Assume that you have been given the following information on Fire Industries:
| Current stock price = $16 | Exercise price of option = $16 |
| Time until expiration of option = 6 months | Risk-free rate = 8% |
| Variance of stock price = 0.12 | d1 =0.28577 |
| d2 = 0.04082 | N(d1) = 0.61247 |
| N(d2) = 051628 |
Using the Black-Scholes Option Pricing Model, what is the value of the option?
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Question No. 5:
A rates of return of asset and market have the following distribution:
Steady of Economy
Probability
Stock A
Stock B
Market Return
Boom
0.3
20%
15%
15%
Normal
0.4
5
5%
9
Recession
0.3
12
-10%
18
Correlation Coefficient with market
-0.3
0.3
Calculate the standard deviation of return for the stock A,B and market.
Calculate Beta Coefficient of stock A and B.
Calculate the required rate of return of stock A & B, if you know the risk-free return 6% and market return represents expected return of market.
Year AT&T Stock Returns Market Index Returns
1 8 6
2 7 3
3 10 12
4 14 13
5 8 9
The equation of the characteristic line for AT&T is:
Group of answer choices
Return = 0.538 + 0.9200*Market Return
Return = -3.089 + 1.2436*Market Return
Return = 0.813 + 0.6530*Market Return
Return = 0.471 + 0.0311*Market Return
Return = 4.578 + 0.5607*Market Return
Consider the following simplified APT model:
Factor
Expected Risk Premium
Market
6.4%
Interest Rate
-0.6%
Yield Spread
5.1%
Factor Risk Exposures
Market
Interest Rate
Yield Spread
Stock
Stock(b1)
(b2)
(b3)
P
1.0
-2.0
-0.2
P2
1.2
0
0.3
P3
0.3
0.5
1.0
Required:
1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3
2.What are the factor risk exposures for the portfolio?
3.What is the portfolio’s expected return?
Chapter 18 Solutions
Bundle: Fundamentals of Financial Management, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 18.A - In words, what is put-call parity?Ch. 18.A - PUT-CALL PARITY A put option written on the stock...Ch. 18.A - PUT-CALL PARITY The current price of a stock is...Ch. 18 - Prob. 1QCh. 18 - Why do options typically sell at prices higher...Ch. 18 - Discuss some of the techniques available to reduce...Ch. 18 - Prob. 4QCh. 18 - Prob. 5QCh. 18 - Give two reasons stockholders might be indifferent...Ch. 18 - OPTIONS A call option on Rosenstein Corporation...
Ch. 18 - OPTIONS The exercise price on one of Boudreaux...Ch. 18 - OPTIONS Which of the following events are likely...Ch. 18 - Intermediate Problems 4-5 BLACK-SCHOLES MODEL...Ch. 18 - FUTURES What is the implied nominal interest rate...Ch. 18 - HEDGING The Zinn Company plans to issue 20,000,000...Ch. 18 - OPTIONS Rachel is considering an investment in...Ch. 18 - BINOMIAL MODEL Misuraca Enterprises current stock...Ch. 18 - Prob. 9PCh. 18 - Prob. 11IC
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- Scenario Probability Expected Return 18% 38% 30% 14% 100% 30% 2 20% 15% -8% 3 4 An analyst creates a probabilistic scenario analysis for projecting stock market returns. The analyst's work is shown in the above table. The Interpretation of the table can be described as follows: The analyst assigns a probability of 18% to the first scenario, which projects a stock market return of 30%. Subsequent rows can be interpreted similarly. The expected return of the analyst's projections is closest to: 100% 16% 30% -8%arrow_forwardHistorical Returns: Expected and Required Rates of Return You have observed the following returns over time: Assume that the risk-free rate is 5% and the market risk premium is 4%. a. What are the betas of Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. % Year 2017 2018 2019 2020 2021 % Stock X 12% 17 -13 2 22 % Stock Y 15% 7 -4 3 12 Stock X: Stock Y: b. What are the required rates of return on Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. Stock X: Stock Y: c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places. Market 13% 12 -10 2 15arrow_forwardQUESTION 1 Exhibit 5.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stock Rit Rmt ai Beta A 10.6 15 0 0.8 Z 9.8 8.0 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)? a. 4.40 b. −1.70 c. 3.40 d. −4.40 e. −1.86arrow_forward
- 4. Option pricing - Multiperiod binomial approach Aa Aa The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market- and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula for different call options, you can solve this formula with algebra or program it into a spreadsheet. Cu{[1 + (rrF / 365)365/(t/n) – d]} Ca{u - [1 + (rrF / 365)365/(t/n)]} + u - d u - d Vc = [1 + (TRF / 365)]365/(t/n) Based on your understanding of the binomial option pricing model, is the following statement true or false? Tu is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of…arrow_forwardBack to Assignment Attempts 0 1. Problem 8.01 (Expected Return) eBook A stock's returns have the following distribution: Average 0 / 4 Standard deviation: Coefficient of variation: Sharpe ratio: 0.1 0.1 0.3 0.3 0.2 1.0 Assume the risk-free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Problem Walk-Through % Demand for the Company's Products Probability of this Demand Occurring Weak Below average Average Above average Strong Rate of Return if this Demand Occurs (30%) (10) 18 37 63arrow_forward
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