Question

1) The price of DEF Corp. stock is $50 per share and the call option on the stock has a price of $10 and an exercise price of $45, with a time to maturity of one year. Assume the risk-free rate is 6%. (5 pts.)

a. What is the price of a put option on the same stock with the same exercise price and maturity?  

b. If the volatility of the stock is 20% during the year, use the two-state model to derive the price of the option.

2)Which of the following regarding the Capital Market Line (CML), is false?

a. In equilibrium, the CAPM says that the CML represents the best risk-reward combinations available to all investors.

b. The slope of the CML is the risk premium on the market portfolio divided by its standard deviation.

c. Although investors will try and achieve higher returns, the forces of competition will move asset prices toward the CML.

d. The CML applies regardless of market conditions.

3) Which of the following is not one of the main implications of the CAPM?

a. In equilibrium, everyone’s relative holdings of risky assets are the same as in the market portfolio.

b. Everyone has perfect or near-perfect information regarding all securities available in the market.

c. The size of the risk premium of the market portfolio is determined by the risk aversion of investors and the volatility of the return.

d. The risk premium on any asset is equal to its beta times the risk premium on the market portfolio.

Answer 1

1. a Put option price at t=0 is $ 2.4528

b. Call option price at t= 0 is $ 9.1383 and Put option price at t=0 is $ 1.5192