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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

a. What is the difference between option spreads and option combinations?b. What is a short straddle? When might it be appropriate?
Which one of the following option combinations best describes a straddle? Buy both a call and a put on the same stock with:a. Different exercise prices and the same expiration date.b. The same
a. What is the most a European call option could be worth? How about an American call option?b. What is the most a European put option could be worth? How about an American put option?
Which of the following strategies is the riskiest options transaction if the underlying stock price is expected to increase substantially?a. Writing a naked call optionb. Writing a naked put
a. Your friend Kristen claims that forming a portfolio today of long call, short put, and short stock has a value at option expiration equal to −K. Does it?b. If a dividend payment occurs before
You create a “strap” by buying two calls and one put on ABC stock, all with a strike price of $45. The calls cost $5 each and the put costs $4. If you close your position when ABC stock is priced
Suppose a put option exists with 15 days to expiration. It is selling for $5.70. The underlying asset price is $42.35. Calculate the intrinsic value and time value of (1) a put with a strike price of
You own a share of stock worth $80. Suppose you sell a call option with a strike price of $80 and also buy a put with a strike price of $80. What is the net effect of these transactions on the risk
Miss Molly, your eccentric (and very wealthy) aunt, wants you to explain something to her. Recently, at the Stable Club, she heard something fantastic. Her friend Rita said that there is a very
If a stock is selling for $25, the exercise price of a put option on that stock is $20, and the time to expiration of the option is 90 days, what are the minimum and maximum prices for the put
Which of the following strategies is most suitable for an investor wishing to eliminate “downside” risk from a long position in stock?a. A long straddle positionb. A short straddle
A current stock price is $50, and a call option with a strike price of $55 maturing in two months has a price of $8. The stock will pay a $1 dividend in one month. If the interest rate is 6 percent,
The current price of an asset is $75. A three-month, at-the-money American call option on the asset has a current value of $5. At what value of the asset will a covered call writer break even at
Suppose you observe the following market prices:S = $40 C = $ 3 P = $ 2The strike price for the call and the put is $40. The riskless interest rate is 6 percent per year, and the options expire in
The current price of an asset is $100. An out-of-the-money American put option with an exercise price of $90 is purchased along with the asset. If the breakeven point for this hedge is at an asset
In Example 15.14, we calculated a $.42 potential arbitrage profit. How would an arbitrageur take advantage of this opportunity? How much profit will the arbitrageur make?Example 15.14Suppose you
Suppose you buy one SPX call option contract with a strike of 4200. At maturity, the S&P 500 index is at 4218. What is your net gain or loss if the premium you paid was $14?
Suppose you buy one SPX call option with a strike of 4125 and write one SPX call option with a strike of 4150. What are the payoffs at maturity to this position for S&P 500 index levels of 4050,
Suppose you buy one SPX put option with a strike of 4100 and write one SPX put option with a strike of 4125. What are the payoffs at maturity to this position for S&P 500 index levels of 4000, 4050,
Suppose you buy one SPX call option with a strike of 4100 and write one SPX put option with a strike of 4100. What are the payoffs at maturity to this position for S&P 500 index levels of 4000, 4050,
Suppose you buy one each of SPX call options with strikes of 4000 and 4200 and write two SPX call options with a strike of 4100. What are the payoffs at maturity to this position for S&P 500 index
A stock is currently selling for $25 per share. In one period, it will be worth either $20 or $30. The riskless interest rate is 5 percent per period. There are no dividends. What is today’s price
Rework the example in this section to price a call option today that expires in one year if K = $105, S = $100, r = 10%, and the stock price will be either $120 or $110 in one year.
What is the value of a call option if the underlying stock price is $100, the strike price is $90, the underlying stock volatility is 40 percent, and the risk-free rate is 4 percent? Assume the
The only variable in the Black-Scholes option pricing model that cannot be directly observed is the:a. Stock price volatility.b. Time to expiration.c. Stock price.d. Risk-free rate.
a. Suppose the stock price today is $95, not $100 as shown in Figure 16.1. Nothing else changes in the detailed example that follows Figure 16.1. Does delta still equal .67? What is the call price?b.
Calculate call and put option prices, given the following inputs to the Black-Scholes option pricing formula: Stock price Strike price Time to maturity Stock volatility Interest rate S
Explore the calculator used to price equity options.
What is the value of a put option using the assumptions from Problem 1?Problem 1What is the value of a call option if the underlying stock price is $100, the strike price is $90, the underlying stock
You purchase a call option with a delta of .34. If the stock price decreases by $2.00, the price of the option will approximately:a. Increase by $.34.b. Decrease by $.34.c. Increase by
The purpose of Example 16.2 was to show you that the Black-Scholes formula is not hard to use—even if at first it looks imposing. If you are in a hurry to price an option or if you want to verify
Review the implied volatility attached to options on Lowe’s (LOW) stock.
a. Look at Table 16.2. Suppose that K = $45 and all other inputs remain the same. What is the price of a call option? What is the price of a put option?b. Look at Table 16.2. Suppose that u = 1.30
In the Black-Scholes option pricing model, the value of an option contract is a function of five inputs. Which of the following is not one of these inputs?a. The price of the underlying stockb. The
Given the inputs to the Black-Scholes option pricing formula provided in Example 16.2, calculate call and put option deltas. The necessary values for d1, N(d1), and N(–d1) were provided in Example
Find the option “Greeks” for an option on General Mills (GIS).
a. Why is it that nothing really changes when there are more than two periods to expiration?b. Why don’t you have to worry about the number of paths the stock price can take before expiration? What
In the Black-Scholes option valuation formula, an increase in a stock’s volatility:a. Increases the associated call option value.b. Decreases the associated put option value.c. Increases or
Consider the following inputs to the Black-Scholes option pricing model:These input values yield a call option price of $6.78 and a put option price of $1.03. Verify these prices from your own
You are managing a $15 million stock portfolio with a beta of 1.1, which you decide to hedge by buying index put options with a contract value of $125,000 per contract and a delta of −.40. How many
a. Using put-call parity and the data in Figure 16.6, at what stock price will the call and the put have the same value?Figure 16.6b. In Figure 16.7, why do the call and the put both have a value of
Which one of the following will increase the value of a call option?a. An increase in interest ratesb. A decrease in time to expiration of the callc. A decrease in the volatility of the underlying
Which one of the following would tend to result in a high value of a call option?a. Interest rates are low.b. The variability of the underlying stock is high.c. There is little time remaining
Which of the following incorrectly states the signs of the impact of an increase in the indicated input factor on call and put option prices?a. Strike price of the option contractb. Time remaining
a. Why do investors care about option deltas?b. Why do you think deltas for call options are positive but deltas for put options are negative?
a. What happens to call and put prices when the price of the underlying stock changes?b. What is the goal of a hedger who uses options?
Increasing the time to maturity of a call option will _____ the price of the option at a(n) _____ rate.a. Increase; increasingb. Decrease; decreasingc. Increase; decreasingd. Decrease; decreasing.
a. In the hedging example in the text, suppose that your equity portfolio had a beta of 1.50 instead of 1.00. What number of SPX call options would be required to form an effective hedge?b.
All else the same, an increase in which of the following will decrease the price of a call option?a. The strike priceb. The price of the underlying stockc. The standard deviation of the underlying
You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio.You have decided to use SPX calls. How many
a. Using the option calculator and the data in the nearby Work the Web, what is the implied standard deviation when the call option market price is $8 instead of $7? $6 instead of $7? What do you
All else the same, as the value of an option used to hedge an equity portfolio increases, the number of options needed to hedge the portfolio:a. Increases.b. Decreases.c. Will not
Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and
a. What are the key differences between a traded stock option and an ESO?b. What is ESO repricing? Why is it controversial?c. If you terminate your employment at The Gap, Inc., how long do you have
You wish to hedge a $5 million stock portfolio with a portfolio beta equal toThe hedging index call option has a delta equal to .5 and a contract value equal to $100,000. Which of the following
You wish to hedge a $10 million stock portfolio with a portfolio beta equal to 1. The hedging index put option has a delta equal to −.5 and a contract value of $200,000. Which of the following
Which of the following provides the best economic interpretation of implied volatility for an underlying stock?a. Implied volatility predicts the stock’s future volatility.b. Implied volatility
You are an employee at L3 Corporation and have just been awarded stock options. The options have a vesting period of five years and an exercise price of $50. L3 stock has an implied volatility of 22
The implied volatility for an at-the-money call option suddenly jumps from 25 percent to 50 percent. This most likely means that:a. The underlying stock has just paid a dividend.b. The volatility
A call option has an exercise price of $60 and matures in six months. The current stock price is $68 and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
In its 10Q dated February 4, 2022, LLL, Inc., had outstanding employee stock options representing over 272 million shares of its stock. LLL accountants estimated the value of these options using the
Compute Sharpe ratios, Treynor ratios, and Jensen’s alphas for Portfolios A, B, and C based on the following returns data, where M and F stand for the market portfolio and risk-free rate,
a. What is the Sharpe ratio of portfolio performance?b. What is the difference between the Sharpe and Sortino ratios?c. What is the Treynor ratio of portfolio performance?d. What is Jensen’s
Over a recent three-year period, the average annual return on a portfolio was 20 percent and the annual return standard deviation for the portfolio was 25 percent. During the same period, the average
Conduct a regression analysis for the returns of the Fidelity Large Cap Stock Fund (FLCSX) on the S&P 500.
a. Explain the difference between systematic risk measured by beta and total risk measured by standard deviation. When are they essentially the same?b. What is a Sharpe-optimal portfolio? c. Among
The Treynor portfolio performance measure for Portfolio P is:a. 8.18.b. 7.62.c. 6.00.d. 5.33.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each
Assume an investment fund had the following returns (in percent) over the last six years: 6, 12, −3, 8, 2, and 5. What is the Sortino ratio for this investment fund? How does it compare to the
Initiate a performance analysis of the Templeton Global Bond Fund (TPINX).
a. What is the probability of realizing a portfolio return one or more standard deviations below the expected mean return?b. What is the probability of realizing a portfolio return two or more
Download a mutual fund performance model into Excel.
The Jensen’s alpha portfolio performance measure for Portfolio R is:a. 2.4 percent.b. 3.4 percent.c. 0 percent.d. −1 percent.A pension fund administrator wants to evaluate the performance of
Over a three-year period, the average return on a portfolio was 20 percent and the beta for the portfolio was 1.25. During the same period, the average return on 90-day Treasury bills was 5 percent.
Which portfolio has the highest Treynor ratio?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S. common
Over a three-year period, the average annual return on a portfolio was 20 percent and the beta for the portfolio was 1.25. During the same period, the average annual return on 90-day Treasury bills
Which portfolio has the highest Sharpe ratio?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S. common
A fund has a return difference of .8 percent and a tracking error of 5.9 percent. What is the fund’s information ratio?
Which portfolio has the highest Jensen’s alpha?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S.
A portfolio has a correlation to the market of .9. What is the R-squared? What percentage of the portfolio’s return is driven by the market? What percentage comes from asset-specific risk?
Suppose you must invest all of your money in only one portfolio from choices A, B, or C as presented in Table 13.1. Which portfolio should you choose?Table 13.1 Investment Performance
Suppose you are considering whether Portfolios A, B, and C presented in Table 13.1 should be included in a broader master portfolio. Should you select one, two, or all three of these portfolios to
Suppose you have the following expected return and risk information for stocks and bonds that will be used to form a Sharpe-optimal portfolio. E(R) = .12 os = .15 E(R₂) = .06 .10 .10 .04 OB Corr
The primary difference between the Sharpe ratio and the Sortino ratio is that the Sortino ratio considers:a. Total volatility.b. Only systematic risk.c. Only upside volatility.d. Only downside
You agree with J. P. Morgan that the stock market will fluctuate and have become concerned with how these fluctuations might affect your stock portfolio. Having read about the VaR method for
Given a data series that is normally distributed with a mean of 100 and a standard deviation of 10, about 99 percent of the numbers in the series will fall within:a. 60 to 140.b. 80 to 120.c. 70
The Ned Kelley Hedge Fund focuses on investing in bank and transportation companies in Australia with above-average risk. The average annual return is 15 percent with an annual return standard
A normal distribution is completely specified by its:a. Mean and correlation.b. Variance and correlation.c. Variance and standard deviation.d. Mean and standard deviation.
A normal random variable is transformed into a standard normal random variable by:a. Subtracting its mean and dividing by its standard deviation.b. Adding its mean and dividing by its standard
The probability that a standard normal random variable is either less than −1 or greater than +1 is:a. 2 percent.b. 5 percent.c. 10 percent.d. 31.74 percent.
The probability that a standard normal random variable is either less than −1.96 or greater than +1.96 is approximately:a. 2 percent.b. 5 percent.c. 10 percent.d. 31.74 percent.
The Value-at-Risk statistic for an investment portfolio states:a. The probability of an investment loss.b. The value of the risky portion of an investment portfolio.c. The smallest investment loss
What is the Sortino ratio for the fund and the market?You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return
What are the sustainable growth rate and required return for Beagle Beauties? Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth
Using the PE, P/CF, and P/S ratios, estimate the 2022 share price for Beagle Beauties.Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your
Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual
Use the information from Problem 29 and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in Problem 29? Why or why not?Problem 29Assume the sustainable
Hank’s Barbecue just paid a dividend of $1.85 per share. The dividends are expected to grow at a 12 percent rate for the next five years and then level off to a 5 percent growth rate indefinitely.
Beagle Beauties is overvalued or undervalued at its current price of around $82? At what price do you feel the stock should sell?Beagle Beauties engages in the development, manufacture, and sale of a
You have been tasked with using the FCF model to value Amara’s Jewelry Co. After your initial review, you find that Amara’s has a reported equity beta of 1.1, a debt-to-equity ratio of .5, and a
Review the news headlines for today’s market.

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