Intro

There are two stocks in a portfolio. We expect the following:

State of Economy	% Chance	Stock A Return	Stock B Return
Bad	50	-20%	2%
Good	50	30%	12%

What are the expected returns of Stock A and Stock B?

The portfolio is constructed so that the expected portfolio return is 6.5%. What percentage of the portfolio is allocated to Stock A?

Calculate the price of a one year call option on the portfolio. Assume the following:

The value of the portfolio is $100.

The strike price of the put is $101.50.

The interest rate is 0%.

Using put-call parity, what is the price of the one year 101.50 call?