Suppose for simplicity that a stock market index such as the S&P 500 currently is at 1,000. Assume that an indexed portfolio on the index pays year end dividends of $20 on an investment of S1000. The risk-free interest rate is 1% and the actual futures price, FO = $1,010. By filling in the table below, show that an investor can make arbitrage profits of $20 by shorting the relatively overpriced futures contract and buying the relatively underpriced stock portfolio using money borrowed at the 1% market interest rate. Action Initial cash flow Cash Flow in 1 Year Borrow $1,000, repay with interest in 1 year Buy stock index for $1,000 Enter short futures position | (F0 = $1,010) %3D Total

Suppose for simplicity that a stock market index such as the S&P 500 currently is at 1,000. Assume that an indexed portfolio on the index pays year end dividends of $20 on an investment of S1000. The risk-free interest rate is 1% and the actual futures price, FO = $1,010. By filling in the table below, show that an investor can make arbitrage profits of $20 by shorting the relatively overpriced futures contract and buying the relatively underpriced stock portfolio using money borrowed at the 1% market interest rate. Action Initial cash flow Cash Flow in 1 Year Borrow $1,000, repay with interest in 1 year Buy stock index for $1,000 Enter short futures position | (F0 = $1,010) %3D Total

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 7P

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Consider a XYZ stock index spot price is 69 and 7-months forward price is 70. The continuously compounded dividend yield and risk-free interest rate are 3% and 5% respectively. Market maker could take arbitrage opportunity by (long/short) forward contract and (long/short) synthetic forward contract which includes (buying/selling) stock and (borrowing / lending ) money. So the profit at expiration time will be . (Please round your answer to 4 decimal places)
b) You are given the following information about Stock X and the market: The annual effective risk-frec rate is 5%. The expected return and volatility for Stock X and the market are shown in the table below: Expected Return Volatility Stock X 5% 40% Market 8% 25% The correlation between the returns of stock X and the market is -0.25. Assume the Capital Asset Pricing Model holds. Calculate the required return for Stock X and determine if the investor should invest in Stock X.
If the risk free rate is 2 %, the expected return on the market portfolio is 12% and the beta of Stock B is 1.1, what is the required rate of return for Stock B according to the Capital Asset Pricing Model (CAPM)? (Round your answer rounded to one decimal place and record without a percent sign).
Assume that the risk-free rate is 2.5% and the market risk premium is 8%. What is the required return for the overall stock market? Round your answer to one decimal place. ? % What is the required rate of return on a stock with a beta of 0.5? Round your answer to one decimal place. ? % The above is a two part question, therefore the second answer is determined based off the first answer provided. Please, please, please do provide both answers.
The market price of a security is $52. Its expected rate of return is 12.1%. The risk-free rate is 4%, and the market risk premium is 7.3%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market price
The stock ABC has a spot price is So = 1100. The continuous interest rate is r = 0.05 and the continuous dividend yield is 6 = 0.02. Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake?
Suppose the value of the S&P 500 stock index is currently 2,400. a. If the 1-year T-bill rate is 6% and the expected dividend yield on the S&P 500 is 4%, what should the 1-year maturity futures price be? Futures price b. What if the T-bill rate is less than the dividend yield, for example, 1%? The T-bill rate is less than the dividend yield, then the futures price should be less than the spot price.
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r4. The characteristics of two of the stocks are as follows: Correlation= Rate of return Stock Expected Return 7% 14% Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) O Yes O No Standard Deviation 30% 70% b. Could the equilibrium rybe greater than rate of return?
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3.50% + 0.65RM + еA RB ом = -1.60% +0.80RM + eB = = 21%; R-squareд 0.22; R-squareg = 0.14 Assume you create a portfolio Q, with investment proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B. Required: a. What is the standard deviation of portfolio Q? Note: Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Do not round intermediate calculations. Round your answer to 2 decimal places. b. What is the beta of portfolio Q? Note: Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Do not round intermediate calculations. Round your answer to 2 decimal places. c. What is the "firm-specific" risk of portfolio Q? Note:…
If the risk free rate is 4.4%, the expected return on the market portfolio (i.e., Rm)( is 11.6%, and the beta of Stock B is 0.9 , what is the required rate of return for Stock B according to the Capital Asset Pricing Model (CAPM)? (Round your answer rounded to one decimal place and record without a percent sign). Your Answer: If the risk free rate is 1.2%, the market risk premium (i.e., Rm - Rf) is 13.5%, and the beta of Stock B is 1.9 , what is the required rate of return for Stock B according to the Capital Asset Pricing Model (CAPM)? (Round your answer rounded to one decimal place and record without a percent sign). Your Answer:
Suppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.
Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.