Use the Black-Scholes formula for the following stock:Time to expirationStandard deviationExercise priceStock priceAnnual interest rateDividend6 months56% per year$55$556%0Recalculate the value of the call with the following changes:a. Time to expirationb. Standard deviationc. Exercise priced. Stock pricee.Interest rate3 months30% per year$63$639%Select each scenario independently.Note: Round your answers to 2 decimal places.a.b.C.d.e.Value of theCall Option

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Answered: Use the Black-Scholes formula for the…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 5P

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Historical Returns: Expected and Required Rates of Return You have observed the following returns over time: Assume that the risk-free rate is 5% and the market risk premium is 4%. a. What are the betas of Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. % Year 2017 2018 2019 2020 2021 % Stock X 12% 17 -13 2 22 % Stock Y 15% 7 -4 3 12 Stock X: Stock Y: b. What are the required rates of return on Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. Stock X: Stock Y: c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places. Market 13% 12 -10 2 15
1. Use the one-period valuation model P = E/(1 + k) + P1/(1 + k) to price the following stocks (remember to decimalize percentages). Earnings (E = $) 1.00 1.00 1.00 0 0 0 1.00 1.50 2.00 0 Required return (k = %) 10 15 20 5 5 5 10 10 10 10 Expected Price Next Year (P1 = $) 20 20 20 20 30 40 50 50 50 1 Answer: Price Today (P = $) 19.10 18.26 17.50 19.05 28.57 38.10 46.36 46.82 47.27 0.91
Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) Portfolio Expected Percentage of Portfolio in Asset W Portfolio Return Beta 0 % 2.60 % 25 4.15 % 0.225 50 5.70 % 0.450 75 7.25 % 0.680 100 8.80 % 0.900 125 10.35 % 1.130 150 11.90 % 1.350 If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Slope of the line
Consider the three stocks in the following table. Pe represents price at time t, and Qe represents shares outstanding at time t Stock C splits two for one in the last period. Stock A B С PO 80 85 35 20 275 650 950 a. Rate of return b. New divisor c. Rate of return P1 85 80 50 01 275 650 950 % P₂ Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t= 1). Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Calculate the new divisor for the price-weighted index in year 2. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Calculate the rate of return for the second period (t=1 to t=2). Note: Round your answer to 2 decimal places. % 85 80 25 02 275 650 1,900
Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?
Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock (b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 a) Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal…
Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 20 % 28 % 2 8 11 3 16 19 4 4 1 5 2 −9 a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? A. ABC B. XYZ c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 20%, 8%, 16%, 4%, or 2%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance? A. Arithmetic B. Geometric
Assume the stock's future prices of stock A and stock B as following distribution State Future Price Stock A Future price Stock B $10 $7 $8 $9 If the time 1 price of stock A is $6, and the time 1 price of stock B is $5. And C and C2 represents the time 1 price of ciaim on state 1, C, represents the time 1 prices of unit claims on states 1 and 2. Use the information about stock prices and payoffs to • Find the time 1 prices C, and C2. • Find the risk - free rate of return, obtained in this market
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period. Stock A B C Po 90 45 80 90 425 450 650 a. Rate of return b. New divisor c. Rate of return P1 95 40 90 91 425 450 650 % P2 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t= 1). Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Calculate the new divisor for the price-weighted index in year 2. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Calculate the rate of return for the second period (t=1 to t = 2). Note: Round your answer to 2 decimal places. % 92 425 450 95 40 45 1,300
Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 20 % 28 % 2 8 11 3 16 19 4 4 1 5 2 −9 (PLEASE SKIP THE FIRST THREE QUESTIONS) a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? multiple choice A. ABC B. XYZ c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 20%, 8%, 16%, 4%, or 2%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future…
SECURITY MARKET LINE You are given the following historical data on market returns, r, and the returns on Stocks A and B, r, and rp: 8A-2 M' A Year 1 29.00% 29.00% 20.00% 2 15.20 15.20 13.10 (10.00) (10.00) 0.50 4 3.30 3.30 7.15 5 23.00 23.00 17.00 31.70 31.70 21.35

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