Hello Ahmed, would you be able to help me with my Investments homework? It's due tomorrow and I really need a tutor to look at it, because I'm not sure if I've done it correctly. I saw you helped a student with a similar assignment. Please find attached.

Homework #3 Questions #1. Develop an economic model in support of your projection for expected return on the SP500 for the ten year period 2016-2026. You can use the Dividend Discount Model if you like, or some other economic model. Answer: We can use Dividend discount model to project expected return on the SP500: 1) If divided is not paid: Expected return = D1/P + g In this equation D1 = expected dividend, P = current price and g = dividend growth rate. If the SP500 does not pay any dividends, D1 would be zero, which means all the dividends are characterized by the growth rate. Hence, growth rate is the only variable that can be used to forecast dividend. 2) If dividend is paid: Value of Stock = D1/(Ke -g) Where; D1 = Expected Dividends next period, Ke= Required rate of return for equity investors and g = Growth rate in dividends forever. Example - applying Dividend Discount Model: Avg. annual FCFE (2016 - 2026) = $551 million Avg. annual dividends (2016 - 2026) = $506 million Dividends as percentage of FCFE = (506/551) *100 = 91.83% Earnings per share in 2026 = $3.13 Dividend Payout Ratio in 2016 = 69.97% Dividends per share in 2026 = $2.19 Return on equity = 11.63% Then we estimate the cost of equity, using a bottom-up levered for the product with a beta of 0.90, a risk-free rate of 5.40% and a market risk premium of 4%. SP500 Beta = 0.90 Cost of Equity = 5.4% + 0.90*4% = 9% We estimate the expected growth rate based on the fundamentals: Expected growth rate = (1- Payout ratio) Return on equity = (1-0.6997)(0.1163) *100 = 3.49% Valuation of stock = D1/ (Ke -g) = 2.19 *1.0349/(0.09-0.0349) = $41.13 #2. Develop an equity screen - find 25 undervalued stocks Answer: Procedure: \"Yahoo Finance\" \"Stock Screener\" My criteria: Market Cap 2% Makes sure that the company is able to pay its short-term obligations I like receiving a steady dividend income. Symbol AAPL WFC CHL JPM WMT VZ NVS Company Apple Inc. Wells Fargo & Company Common St China Mobile Limited Common Sto JP Morgan Chase & Co. Common St Wal-Mart Stores, Inc. Common St Verizon Communications Inc. Com Novartis AG Common Stock Retail Price 93.74 Market Cap 519.75B Div/Yld 2.40% Beta 1.44362 P/E 9.98 49.98 253.73B 3.02% 0.91504 12.13 57.52 235.54B 2.65% 0.452166 14.05 63.20 231.50B 2.77% 1.22629 10.53 66.87 213.05B 2.90% 0.192034 14.63 50.94 75.97 207.52B 180.34B 4.43% 3.54% 0.480108 0.625523 11.66 10.41 TM INTC IBM CSCO HSBC RY.TO GSK TD.TO RY UTX TD BNS.TO WBK USB SAN CNU.TO UBS MTU Toyota Motor Corporation Common Intel Corporation International Business Machines Cisco Systems, Inc. HSBC Holdings, plc. Common Stoc ROYAL BANK OF CANADA GlaxoSmithKline PLC Common Stoc TORONTO-DOMINION BANK Royal Bank Of Canada Common Sto United Technologies Corporation Toronto Dominion Bank (The) Com BANK OF NOVA SCOTIA Westpac Banking Corporation Com U.S. Bancorp Common Stock Banco Santander, S.A. Sponsored CNOOC LIMITED UBS Group AG Registered Ordinar Mitsubishi UFJ Financial Group, 101.70 30.28 156.32B 143.04B 3.16% 3.34% 0.591013 1.05811 7.65 13.00 145.94 27.49 140.23B 138.33B 3.67% 3.72% 0.791609 1.19299 10.87 13.61 33.33 77.92 130.68B 115.75B 12.43% 4.17% 1.02183 0.961496 10.42 11.71 42.91 103.84B 6.05% 1.00897 8.60 55.85 103.34B 3.96% 0.798789 13.02 62.12 92.28B 4.13% 1.19324 11.84 104.37 87.30B 2.53% 1.08826 12.11 44.50 65.80 82.34B 79.16B 3.78% 4.41% 1.01299 1.39828 13.15 11.61 23.60 42.69 74.91B 74.17B 5.76% 2.36% 1.36859 0.825368 12.27 13.51 5.03 157.50 72.40B 70.32B 4.41% 5.92% 1.78106 N/A 11.15 11.01 17.27 64.78B 3.43% 1.21278 10.27 4.60 63.43B 3.14% 1.5197 4.94 #3. Take one of the undervalued stocks from your screen in #2 and prepare a financial analysis of this stock. That is, estimate the expected return on the stock and compare it with the required return using the CAPM. What is your estimate of alpha? NEED HELP WITH THIS ONE! Answer: Financial Analysis on Wells Fargo & Company Common St. #4. Graph the profit/loss for the following options positions: - Long at-the-money call with strike 40 and premium 2; - Short at-the-money put with strike 40 and premium 2 - Combination of the long call and short put, both with strike=40 and premium=2 - Bull spread: buy call with strike 40 and premium 2; and sell call with strike 44 and premium 1 - Long straddle: buy call and put both with strike 40 and premium 3 - Short straddle: sell call and put, both with strike 40 and premium 3 Answer: - See attached excel file Question 4: 1) Long at the-money call with strike 40 and premium 2: 10 8 6 Paay off 4 2 0 -2 25 30 35 40 -4 Market price of stock 2) Short at-the-money put with strike 40 and premium 2: 45 50 55 4 2 0 Payoff -2 25 30 35 40 45 50 55 -4 -6 -8 -10 Market price of stock 3) Bull spread: buy call with strike 40 and premium 2; and sell call with strike 44 and premium 1 6 5 4 Payoff 3 2 1 0 25 30 35 40 45 Market price of stock 4) Long straddle: buy call and put both with strike 40 and premium 3 50 55 6 4 2 Payoff 0 -2 25 30 35 40 45 50 55 50 55 -4 -6 -8 Market price of stock 5) Short straddle: sell call and put, both with strike 40 and premium 3 8 6 4 Payoff 2 0 -2 25 30 35 40 45 -4 -6 Market price of stock #5. Suppose the price of a non-dividend paying stock is 40 and can go to 36 or 44 in 1 period. Assume the risk free rate is zero for this period. - Find the value of a call option with strike 40 - Find the value of a put option with strike 38 Answer: The value of the call if stock prices increases, C1 = 4 The value of the call if stock price decreases, C2 = 0 Since, the risk free rate of interest is zero, so R = (1 + 0.1) = 1 Now, u = 1 + % increase in the stock price in 1 period = (1 + 0.1) = 1.1 d = 1 - % decrease in stock price in 1 period = (1 - 0.1) = 0.9 Probability of price increase = (R - d) / (u - d) = (1 - 0.9) / (1.1 - 0.9) P = 0.5 Probability of price decrease = (1 - p) (1 - p) = 0.5 Value of call option = C1*p + C2*(1 - p) / R = 4*0.5 + 0 / 1 = 2 For second part, first we find the call option with same strike price and then by using the call parity theorem, we would find the value of put option. The value of the call if stock prices increases, C1 = 6 The value of the call if stock price decreases, C2 = 2 Since, the risk free rate of interest is zero, so R = (1 + 0.1) = 1 Now, u = 1 + % increase in the stock price in 1 period = (1 + 0.1) = 1.1 d = 1 - % decrease in stock price in 1 period = (1 - 0.1) = 0.9 Probability of price increase = (R - d) / (u - d) = (1 - 0.9) / (1.1 - 0.9) P = 0.5 Probability of price decrease = (1 - p) (1 - p) = 0.5 Value of call option = C1*p + C2*(1 - p) / R = 4*0.5 + 2*0.5 / 1 = 2 + 1 = 3 Bu put call parity theorem, Value of put option = 3 + 38 - 40 = 1 #6. You would like to speculate on a rise in the price of a certain stock. The current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You have $5,800 to invest. Identify two alternative strategies, one involving an investment in the stock and the other involving investment in the option. What are the potential gains and losses from each? Answer: One strategy is to buy 200 shares. Another is to buy 2,000 options (20 contracts). If the share price does well, the second strategy will give rise to greater gains. For example, if the share price goes up to $40, you gain [2,000 ($40 - $30)] - $5,800 = $14,200 from the second strategy and only 200 ($40 - $29) = $2,200 from the first strategy. Conversely, if the share price goes down, the second strategy yields greater losses. For example, if the share price goes down to $25, the first strategy leads to a loss of 200 ($29 - $25) = $800, whereas the second strategy leads to a loss of the entire $5,800 investment. #7. What is \"Quantitative Easing\" (QE)? What do you think are the primary effects of QE? Answer: - Quantitative easing (QE) refers to a monetary policy used by the central bank to lower interest rates in the economy by purchasing government securities and other market securities. The objective of quantitative easing is to lower the interest rate and increase money supply. - According to Barosso (2016) some of the primary effects of QE are increase in the inflation rate and improvement of the liquidity position of the individuals (since they are encouraged to borrow more money). #8. The spot price of gold is $1200 per ounce. Assuming the one-year risk-free interest rate is 10% and the cost of storing gold is zero, what is your best estimate of the one-year forward price of gold? Answer: Formula: S0 (1+ rf)T ROR = (F-S)/S = 0.10 F = S (1.10) = 1200(1.10) = $1320