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##### financial markets

**Description**

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**Question**

* Show all work where required. 1. (25 points) You are given the following data on three securities, A, B, and the market, M: Security Expected Return Standard Deviation Covariance with “M” A 10% 15% 225 B 10% 15% 180 M 10% 15% 225 Note: The risk-free rate is . Compute the correlation between A and the market, and B and the market. (6 points) Based on your answer to part (a), which of the two securities, A or B, is better to be combined into a portfolio with M? Explain briefly. Document Preview: * Show all work where required. 1. (25 points) You are given the following data on three securities, A, B, and the market, M: Security Expected Return Standard Deviation Covariance with “M” A 10% 15% 225 B 10% 15% 180 M 10% 15% 225 Note: The risk-free rate is . Compute the correlation between A and the market, and B and the market. (6 points) Based on your answer to part (a), which of the two securities, A or B, is better to be combined into a portfolio with M? Explain briefly. (5 points) Compute the expected return and standard deviation for a portfolio formed between M and your choice in part (b). Then compute the weighted-average standard deviation of this portfolio and explain why the portfolio’s actual standard deviation is less than just holding any of the three securities, all of which have a standard deviation of 15% and an expected return of 10%. (10 points) Compute the systematic risk CAPM expected return for your choice in part (b). Why is it less than 10%? Explain in the context of systematic and total risk. (4 points) 2. (25 points) You are given the following data for options on a common stock

Use the Black-Scholes Option Pricing Model to find the price of the options. Find and (6 points) Use your answers from a(i) to find and . Note: Round your answers to 2 decimal places before looking the values up in the tables. (4 points) Use the Black-Scholes OPM to find C. (5 points) Use the put-call parity relationship to find the value of . (4 points) b. State the intrinsic value and the speculative premium for the call and put options. Why is the speculative premium so small for each option? (5 points) 3. (25 points) A call option has a value of and a put has a value of . Both options have an exercise price of . The options are to expire today. Compute the payoff schedule for the call option using... Attachments: financial-mar....doc Jun 18 2013 04:27 AM

Solution ID:608864 | This paper was updated on 26-Nov-2015

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