For a price of $95, Sherylanne will sell you a share which is expected to pay its first dividend of $10 in 7 years (t=7), and will continue to pay the same $10 dividend every year after that forever.
The required return of the stock is 10% pa.
Which of the following statements about short-selling is NOT true?
A young lady is trying to decide if she should attend university or begin working straight away in her home town.
The young lady's grandma says that she should not go to university because she is less likely to marry the local village boy whom she likes because she will spend less time with him if she attends university.
What's the correct way to classify this item from a capital budgeting perspective when trying to decide whether to attend university?
The cost of not marrying the local village boy should be classified as:
Question 556 portfolio risk, portfolio return, standard deviation
An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 12% pa.
- Stock A has an expected return of 10% pa and a standard deviation of 20% pa.
- Stock B has an expected return of 15% pa and a standard deviation of 30% pa.
The correlation coefficient between stock A and B's expected returns is 70%.
What will be the annual standard deviation of the portfolio with this 12% pa target return?
The covariance and correlation of two stocks X and Y's annual returns are calculated over a number of years. The units of the returns are in percent per annum ##(\% pa)##.
What are the units of the covariance ##(\sigma_{X,Y})## and correlation ##(\rho_{X,Y})## of returns respectively?
Hint: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.
Question 793 option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing
A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.
European Options on a Non-dividend Paying Stock | |||
Description | Symbol | Put Values | Call Values |
Spot price ($) | ##S_0## | 10 | 10 |
Strike price ($) | ##K_T## | 12 | 7 |
Risk free cont. comp. rate (pa) | ##r## | 0.05 | 0.05 |
Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.4 | 0.4 |
Option maturity (years) | ##T## | 1 | 1 |
Option price ($) | ##p_0## or ##c_0## | 2.495350486 | 3.601466138 |
##N[d_1]## | ##\partial c/\partial S## | 0.888138405 | |
##N[d_2]## | ##N[d_2]## | 0.792946442 | |
##-N[-d_1]## | ##\partial p/\partial S## | -0.552034778 | |
##N[-d_2]## | ##N[-d_2]## | 0.207053558 | |
Gamma | ##\Gamma = \partial^2 c/\partial S^2## or ##\partial^2 p/\partial S^2## | 0.098885989 | 0.047577422 |
Theta | ##\Theta = \partial c/\partial T## or ##\partial p/\partial T## | 0.348152078 | 0.672379961 |
Which of the following statements is NOT correct?
Question 922 Stutzer portfolio performance indicator, Sharpe ratio, no explanation
Stutzer’s Portfolio Performance Indicator (PPI) ranks portfolios similarly to what other performance metric, assuming that the portfolios’ continuously compounded returns (LGDR’s) are normally distributed?
Question 950 future, backwardation