EXPECTED AND REQUIRED RATES OF RETURN
Assume that the risk-free rate is 6% and the market risk premium is 3%.
What is the required return for the overall stock market? Round your answer to two decimal places. %
What is the required rate of return on a stock with a beta of 0.8? Round your answer to two decimal places.
For an index, the $930 strike 6 months call premium is $45.34
and the $950 strike 6 months call is selling for $28.78. What is
the maximum profit that an investor can obtain from a strategy
employing a bull spread at strike prices 930 and 950 with these two
call options over 6 months? Interest rates is 0.5% per month.
$2.44 B. $2.94 C. $37.06 D. $36.56
A stock's beta is 5, the market risk premium is 6%, and the
risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
A stock's beta is 1.5, the expected market return is 6%, and
the risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
You have 2 assets to choose from when forming a portfolio: the
market portfolio and a risk-free...
The spot price for gold is $1,200 and the the 6-month risk-free
rate is 3% continuously compounded.
(1) Calculate the 6-month Futures price of gold.
(2) Describe a trading strategy to make arbitrage profits if the
quoted futures price is $10 lower than the fair value you calculate
in Part (1). Show the cash flows to each element of your trading
strategy.
(3) Describe a trading strategy to make arbitrage profits if the
quoted futures price is $10 less than...
The spot price for gold is $1,200 and the the 6-month risk-free
rate is 3% continuously compounded.
(1) Calculate the 6-month Futures price of gold.
(2) Describe a trading strategy to make arbitrage profits if the
quoted futures price is $10 lower than the fair value you calculate
in Part (1). Show the cash flows to each element of your trading
strategy.
(3) Describe a trading strategy to make arbitrage profits if the
quoted futures price is $10 more than...
spot price: 66
strike price 68
risk-free interest rate is 6% per annum with continuous
compounding, please undertake option valuations and answer related
questions according to following instructions: Binomial trees:
Additionally, assume that over each of the next two four-month
periods, the share price is expected to go up by 11% or down by
10%.
Use a two-step binomial tree to calculate the value of an
eight-month European call option using risk-neutral valuation.
Use a two-step binomial tree to calculate...
spot price: 66
strike price 68
risk-free interest rate is 6% per annum with continuous
compounding, please undertake option valuations and answer related
questions according to following instructions:
Binomial trees: Additionally, assume that over each of the next
two four-month periods, the share price is expected to go up by 11%
or down by 10%.
a. Use a two-step binomial tree to calculate the value of an
eight-month European call option using the no-arbitrage
approach.
b. Use a two-step binomial...
1. The risk free rate is 2%, the risk premium for the market is
5%, and a stock has an expected return of 10.5%. What is the firm’s
beta?
2. A firm has a beta of 1.3 and the risk premium for the market
is 6%. If the firms expected return is 11%, what is the risk free
rate?
3. A firm with a beta of 1.5 has a market return of 15% when the
risk free rate is 3%...
3) You expect a risk free rate of
8% and a market risk premium of 6%. You ask a stockbroker what the
firm’s research department expects for stocks “U”, “N”, and “D”.
The broker responds with the following information:
Stock
Beta
Current Price
Expected Price
Expected Dividend
U
0.70
25
27
1.00
N
1.00
40
42
1.25
D
1.15
33
40
1.00
Compute the expected & required return for these three
stocks, and plot them on an SML graph. Indicate...