(a)
To calculate:
If the high water mark is
Introduction:
The Black-scholes model is used for determining the price of European call option by using the variation of price in financial instruments. This model uses stock price, option price, and time for ascertaining the call option price.
Answer to Problem 11PS
The annual incentive fee is
Explanation of Solution
Given:
The black-scholes formula is as follows:
For calculating the
Now the calculation of
The value of
Thus, the value of
Now, the calculation of
The value of
Thus, the value of
By substituting the values, value of call option is:
Thus, the value of call option is
The computation of value of incentive fee is as follows:
Thus, the annual incentive fee is
(b)
To calculate:
If the high water mark is zero and asset value is
Introduction:
The Black-scholes model is used for determining the price of European call option by using the variation of price in financial instruments. This model uses stock price, option price, and time for ascertaining the call option price.
Answer to Problem 11PS
The annual incentive fee is
Explanation of Solution
Given:
The value of X is changed to
The black-scholes formula is as follows:
For calculating the
Now the calculation of
The value of
Thus, the value of
Now, the calculation of
The value of
Thus, the value of
By substituting the values, value of call option is:
Thus, the value of call option is
The computation of value of incentive fee is as follows:
Thus, the annual incentive fee is
(c)
To calculate:
If the high water mark is zero and asset value is
Introduction:
The Black-scholes model is used for determining the price of European call option by using the variation of price in financial instruments. This model uses stock price, option price, and time for ascertaining the call option price.
Answer to Problem 11PS
The annual incentive fee is
Explanation of Solution
Given:
The black-scholes formula is as follows:
For calculating the
The value of X has been changed which is:
Now the calculation of
The value of
Thus, the value of
Now, the calculation of
The value of
Thus, the value of
By substituting the values, value of call option is:
Thus, the value of call option is
The computation of value of incentive fee is as follows:
Thus, the annual incentive fee is
(d)
To calculate:
If the high water mark is zero and asset value is
Introduction:
The Black-scholes model is used for determining the price of European call option by using the variation of price in financial instruments. This model uses stock price, option price, and time for ascertaining the call option price.
Answer to Problem 11PS
The annual incentive fee is
Explanation of Solution
Given:
The value of X is changed to
The black-scholes formula is as follows:
For calculating the
Now the calculation of
The value of
Thus, the value of
Now, the calculation of
The value of
Thus, the value of
By substituting the values, value of call option is:
Thus, the value of call option is
The computation of value of incentive fee is as follows:
Thus, the annual incentive fee is
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Chapter 26 Solutions
INVESTMENTS LOOSE LEAF VALUE
- Suppose that the return for a particular large-cap stock fund is normally distributed with a mean of 14.4% and standard deviation of 4.4%. a. What is the probability that the large-cap stock fund has a return of at least 20%? b. What is the probability that the large-cap stock fund has a return of 10% or less?arrow_forwardConsider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?arrow_forwardA company's fund manager has a P20,000,000 portfolio with a beta of 0.75. The risk-free rate is 4.50% and the market risk premium is 5.00%.The manager expects to receive an additional P30,000,000, which she plans to invest in several stocks. After investing the additional funds, she wants the fund's required return to be 9.50%. 1. What is the required rate of return on the initial P20M investment? 2. What is the rate of return of all risky and risk-free securities? 3. To achieve the fund manager’s required return target, the funds should be invested in an investment with a beta of 4. Judge the overall riskiness of the P50M portfolio A. Aggressive B. Neutral C. Conservativearrow_forward
- Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $300,000 1.25 B 700,000 (0.75) C 1,500,000 1.00 D 1,500,000 0.75 If the market's return in 12% and the risk-free rate is 5%, what is the fund's required rate of return (You must calculate the fund's beta, then its required rate of return).arrow_forwardSuppose you are the money manager of a $3.92 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 360,000 1.50 B 700,000 (0.50 ) C 960,000 1.25 D 1,900,000 0.75 If the market's required rate of return is 10% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardA hedge fund charges a management fee of 3 percent and an incentive fee of 25 percent for all returns over a benchmark return of 4%. The risk-free rate is 2% and the standard deviation of the funds continuously compounded returns has been 23%. The current net asset value is $55 per share. What is the value of all fees expressed as a percent at the start of the investment period?arrow_forward
- A mutual fund manager has a $80 million portfolio with a beta of 2.0. The risk-free rate is 4.3%, and the market risk premium is 5.5%. The manager expects to receive an additional $20 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 14%. What should be the average beta of the new stocks added to the portfolio? options: A)0.8182 B)0.7364 C)0.8591 D)0.9000 E)0.7773arrow_forwardA mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 3.75%, and the market risk premium is 7.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 12%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwardSuppose you are the money manager of a $5.26 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 580,000 1.50 B 800,000 (0.50) C 980,000 1.25 D 2,900,000 0.75 If the market's required rate of return is 9% and the risk-free rate is 5%, what is the fund's required rate of return?arrow_forward
- A mutual fund manager has a $20 million portfolio with a beta of 2.8. The risk-free rate is 2.5%, and the market risk premium is 5%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 15%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to one decimal place.arrow_forwardConsider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 16 %, the risk-free rate is 7 %, and the Fund's assets are as follows: Stock Investment Beta A $ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D 1,000,000 1.1 Round it to two decimal places without the percent sign (%), e.g., 13.54.arrow_forwardSuppose you are the money manager of a $4.07 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 380,000 1.50 B 600,000 (0.50) C 1,140,000 1.25 D 1,950,000 0.75 If the market's required rate of return is 12% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.9% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 5.0%. Mudd has a beta of 2.7, and its realized rate of return has averaged 13.0% over the past 5 years. Round your answer to two decimal places.arrow_forward
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