Chapter 2: Q17I (page 185)
Find the Black-Scholes value of a put option on the stock in the previous problem with the same exercise price and expiration as the call option.
$6.60
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If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock?
Assume a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 30%.
Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3%, and one-half have an alpha of - 3%. The analyst then buys \(1 million of an equally weighted portfolio of the positive-alpha stocks and sells short \)1 million of an equally weighted portfolio of the negative-alpha stocks.
a. What is the expected profit (in dollars), and what is the standard deviation of the analyst’s profit?
b. How does your answer change if the analyst examines 50 stocks instead of 20? 100 stocks?
Which version of the efficient market hypothesis (weak, semi-strong, or strong-form) focuses on the most inclusive set of information?
Assume both portfolios A and B are well diversified, that E ( r A ) = 14% and E ( r B ) = 14.8%. If the economy has only one factor, andβA= 1 whileβB = 1.1, what must be the risk-free rate?
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