EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 20, Problem 25PS
a.
Summary Introduction
To draw: A payoff graph depicting the strategy of given information.
Introduction:
Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the
b.
Summary Introduction
To draw: A profit graph depicting the strategy of given information.
Introduction:
Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.
c.
Summary Introduction
To analyze: Whether the portfolio has positive beta or negative when the underlying stock has positive beta.
Introduction:
Positive beta: Normally beta (ß) is used to measure the volatility of investment returns which are related to the whole market. When a stock values goes in the same direction in which the market prices are moving, it is said to be a positive beta.
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You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date.a. Draw the payoff graph for this strategy.b. Draw the profit graph for this strategy.c. If the underlying stock has positive beta, does this portfolio have positive or negative beta?
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, and aggressive stock A, and a defensive stock D.
A. Find the beta of each stock
B. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
C. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
D. Which stock seems to be a better buy on the basis of your answers to (a) through (c).
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.
a. Find the beta of each stock. (Round your answers to 2 decimal places.)
Stock A
Stock D
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.)
Market Portfolio %
Stock A %
Stock D %
c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Stock A
Stock D
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Chapter 20 Solutions
EBK INVESTMENTS
Ch. 20 - Prob. 1PSCh. 20 - Prob. 2PSCh. 20 - Prob. 3PSCh. 20 - Prob. 4PSCh. 20 - Prob. 5PSCh. 20 - Prob. 6PSCh. 20 - Prob. 7PSCh. 20 - Prob. 8PSCh. 20 - Prob. 9PSCh. 20 - Prob. 10PS
Ch. 20 - Prob. 11PSCh. 20 - Prob. 12PSCh. 20 - Prob. 13PSCh. 20 - Prob. 14PSCh. 20 - Prob. 15PSCh. 20 - Prob. 16PSCh. 20 - Prob. 17PSCh. 20 - Prob. 18PSCh. 20 - Prob. 19PSCh. 20 - Prob. 20PSCh. 20 - Prob. 21PSCh. 20 - Prob. 22PSCh. 20 - Prob. 23PSCh. 20 - Prob. 24PSCh. 20 - Prob. 25PSCh. 20 - Prob. 26PSCh. 20 - Prob. 27PSCh. 20 - Prob. 28PSCh. 20 - Prob. 29PSCh. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 1CPCh. 20 - Prob. 2CPCh. 20 - Prob. 3CPCh. 20 - Prob. 4CPCh. 20 - Prob. 5CP
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- You have a portfolio that is equally invested in Stock F with a beta of .95, Stock G with a beta of 1.37, and the market. What is the beta of your portfolio?arrow_forwardStocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (7 %) (26 %) 0.1 3 0 0.5 14 22 0.2 20 26 0.1 36 50 Calculate the expected rate of return, , for Stock B ( = 14.20%.) Do not round intermediate calculations. Round your answer to two decimal places. % If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. If Stock B is less highly…arrow_forwardConsider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −10% −5% Boom 19 25 15 Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?arrow_forward
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