INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 21, Problem 20PS
Summary Introduction
Case summary:
Mr. M is considering preparing delta-hedge strategy for safeguarding the portfolio against uncertainties of market volatility. Mr M. has 51,750 shares and he is considering taking short on call options which has delta of 0.69. The stock price falls.
Character in this case: Mr. M
Adequate information:
Delta of call option is 0.69
Number of shares is 51,750
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According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.
In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike price
Given the information in the table below, which of the following statements is correct, assuming that either security will be held in a portfolio with other investments?
Stock
Expected Return
Required Return
Beta
Standard Deviation
A
10%
12%
0.9
25%
B
8%
5%
0.3
35%
Question 26 options:
The investor should purchase both stocks because their beta is less than that of the market.
The investor should purchase A since its risk, as measured by standard deviation, is the lowest.
The investor should purchase A because it requires the highest rate of return.
The investor should purchase B since its expected return exceeds its required return.
Chapter 21 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
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- If the stock price falls and the call price rises, then what has happened to the call option’s implied volatility?arrow_forwardExplain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.arrow_forward2. In the context of binomial option pricing model, a decrease in the stock price volatility will reduce the current option value True or falsearrow_forward
- What effect does Stock Price have on call option price? What effect does Time expiration have on call option price? What effect does Risk-free rate have on call option price? What effect does Standard Deviation of Stock returns have on call option price?arrow_forwardn general, can the risk of a portfolio be reduced to zero byincreasing the number of stocks in the portfolio? Explainarrow_forwardAssume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.arrow_forward
- Assume that the CAPM assumptions hold. Consider the following statements:i. A stock with a beta below zero will tend to move in the same direction as the market but will tend to move less aggressively in that direction than the market does.ii. Alpha measures the additional risk we take on top of the risk of the market portfolio.arrow_forwardWhich of the following events are likely to increase the market value of a calloption on a common stock? Explain.a. An increase in the stock’s priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expiresarrow_forwardA stock has an expected return of 0.11, its bets is 0.82, and the risk-free rate is 0.04. What must the expected return on the market be?arrow_forward
- When the required returns on all stocks are graphed against their corresponding betas, Question 16Answer a.we obtain the security market line b.No option is correct c.we obtain the beta d.we obtain the return linearrow_forwardDescribe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?arrow_forwardAssume a stock has a required return on equity, ?? = 12%. The risk-free rate is ?? = 5% and themarket return is ?? = 10%. Given this information, what is the beta of the stock?arrow_forward
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