7. You buy shares of Simon Property Group (SPG) for $38. Simultaneously with the stock purchase, you buy 3-month puts in SPG equal to the total value of your stock purchases. Each put costs $0.50 with a strike price of $35. You also simultaneously sell 3- month calls in SPG for $0.50 with a strike price of $40. a) What is the maximum profit and what is the maximum loss for your strategy? b) Show your position strategies in a typical option profit and loss diagram, considering the possible stock prices which would affect your strategy at expiration of the options in 3 months. on 2 CAPM & MPT questions based on Class 10 (30 points) 8. Consider two potential portfolios, A and B. Based on current dividend yields and your estimates of expected capital gains, you expect rates of return on portfolio A is 12% and on portfolio B is 16%. The standard deviation of portfolio A is 12% annually, and the standard deviation of portfolio B is 31%. You have determined that the Beta of portfolio A is 0.7, while the Beta of portfolio B is 1.4. The current risk-free (US Treasury) rate is 5.0%. Your estimate for the expected return of the S&P 500 market index is 13%. The standard deviation of the S&P 500 index is 18%. Questions: a. If you currently hold only the market index portfolio, would you choose to add either of these portfolios (either A or B) to your overall portfolio? Explain and show your work. (Hint: think about the CAPM). b. IF instead you could invest ONLY in Treasuries and ONLY ONE of these portfolios, would you choose A or B? Why? (Hint: think about one of the ratios in the Class 10 slide deck - which ratio is most relevant here?) 7. You buy shares of Simon Property Group (SPG) for $38. Simultaneously with the stock purchase, you buy 3-month puts in SPG equal to the total value of your stock purchases. Each put costs $0.50 with a strike price of $35. You also simultaneously sell 3- month calls in SPG for $0.50 with a strike price of $40. a) What is the maximum profit and what is the maximum loss for your strategy? b) Show your position strategies in a typical option profit and loss diagram, considering the possible stock prices which would affect your strategy at expiration of the options in 3 months. on 2 CAPM & MPT questions based on Class 10 (30 points) 8. Consider two potential portfolios, A and B. Based on current dividend yields and your estimates of expected capital gains, you expect rates of return on portfolio A is 12% and on portfolio B is 16%. The standard deviation of portfolio A is 12% annually, and the standard deviation of portfolio B is 31%. You have determined that the Beta of portfolio A is 0.7, while the Beta of portfolio B is 1.4. The current risk-free (US Treasury) rate is 5.0%. Your estimate for the expected return of the S&P 500 market index is 13%. The standard deviation of the S&P 500 index is 18%. Questions: a. If you currently hold only the market index portfolio, would you choose to add either of these portfolios (either A or B) to your overall portfolio? Explain and show your work. (Hint: think about the CAPM). b. IF instead you could invest ONLY in Treasuries and ONLY ONE of these portfolios, would you choose A or B? Why? (Hint: think about one of the ratios in the Class 10 slide deck - which ratio is most relevant here?)
