Please assist with attached questions and provide formula used to answer each question.

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5. The value of an option is influenced by a couple of variables which includes underlying asset's spot price, the strike price, the volatility of the underlying asset, the time to maturity or expiration and the risk-free rate of return: Which of the following statements about the European call option is most correct: 1 2 3 4 The value of a call option increases with decrease in volatility. The value of a call option increases with decrease in spot price. The value of a call option decreases with increase in time to expiration. The value of a call option decreases with increase in strike price. Use the following information to answer question 6 and 7 An investor purchases a non-dividend paying share, currently trading at R200. This share is expected to increase or decrease by 10% over the next six-month period. The risk-free interest rate is 7% per annum. 6. The delta (p) of a six-months European call option on this share with a R210 strike price is closest to: 1 2 3 4 0.2500 0.3027 0.1667 0.0158 7. The price (c) of a six-months European call option on this share with a R210 strike price is closest to: 1 2 3 4 R6.89 R6.90 R6.50 R5.97 8. A stock is selling at R70, a 6-month put option with strike price of R75 is selling for R13, a 6-month call with strike of R75 is selling for R5, and the risk-free rate is 6%. How much, if anything, can be made on an arbitrage? 1 2 3 4 R5.15 R4.72 R0.00 (no arbitrage) R3.84 9. Which of the following is not considered a \"cost of carry\"? 1 2 3 4 An opportunity cost for the net amount of invested capital. A premium for the convenience of consuming the asset now. Commissions for physical storage. A risk premium for uncertainty. 10. A Radrachie PLC share is available at R50. The theoretical/calculated futures price is R57 per share. If the futures contract available at that stage was R55, indicate the appropriate strategy that would earn an arbitrage profit. 1 2 3 4 -10- Short futures, long spot and borrow money Long futures, long spot and invest proceeds Long futures, short spot and invest proceeds Short futures, long spot and invest proceeds PINV039/101 11. The following will decrease the value of a put option except? 1 2 3 4 An increase in the underlying asset price. A decrease in the time to expiration. A decrease in strike price. An increase in volatility. 12. Assume that you purchased shares at a price of R20 per share. At this time you wrote a call option with a R20 strike and received a call price of R5. The share currently trades at R30. Calculate the profit or loss from this option strategy. 1 2 3 4 -R10 R10 -R5 R5 13. An equity portfolio manager can neutralize the risk of falling share prices by entering into a hedge position where the payoffs are: 1 2 3 4 Not correlated with the existing exposure. Positively correlated with the existing exposure. Negatively correlated with the existing exposure. Identical to the loss or gain from the existing exposure. 14. You wish to obtain an exposure to a specific share. Suppose that you buy a call with a strike price of R33 and a price of R7.77. Calculate the effective price paid to purchase the share if the price after 100 days is R32. 1 2 3 4 R28.25 R39.77 R76.75 R81.75 15. Which one of the following statements is true? 1 2 3 4 Derivatives does not assist in forming cash prices. Derivatives does not provide additional information to the market. Derivatives help shift risk from risk-averse investors to risk-takers. In many cases, the investment in derivatives is less than what is required in the cash market. -11- ASSIGNMENT 02 Due date: Unique number 29 July 2016 817298 Select the correct alternative by completing the mark-reading sheet or submitting it online at https://my.unisa.ac.za. Remember to include the unique number for this assignment. Questions: 1. Which of the following is the most valid justification for including real estate as part of an investment portfolio? 1 2 3 4 High liquidity. Low project-specific risk. Low management and information costs. Low correlation of real estate with shares and bonds. Use the following information to answer question 2 to 4. Probability of occurrence Return on Security Return on Security A B 30% 7% 7% 30% 12% 5% 40% 8% 14% Risk-free rate is 7% 2. Calculate the required rate of return for A. 1 2 3 4 8.30% 8.40% 8.70% 8.90% 3. Calculate the standard deviation for security A. 1 2 3 4 2.07% 1.35% 1.40% 1.56% 4. Calculate the sharpe ratio for security A. 1 2 3 4 0.67 0.75 0.92 0.18 5. The covariance of Security X's returns and Security Y's returns is 10, and the variance of Security X's returns is 13% and the variance of Security Y's returns is 17%. The correlation coefficient of the security X and Y returns is closest to: 1 2 3 4 -12- 1.83 0.67 0.25 0.05 PINV039/101 6. A risk-averse investor owning shares in Mandara Corporation decides to add the shares of either Glenlone Corporation or Chisipite Corporation to her portfolio. All three shares offer the same expected return and total risk. The covariance of returns between Mandara and Glenlone is +1, and Mandara and Chisipite is + 0,05. Portfolio risk is expected to: 1 2 3 4 Decline more by buying Glenlone Corporation. Increase more by buying Chisipite Corporation. Remain the same by buying Chisipite Corporation. Remain the same by buying Glenlone Corporation. 7. Consistent with capital market theory, systematic risk: 1 2 3 4 remains in the market portfolio. is described as diversifiable risk. is the firm's unique risk. refers to total risk. 8. According to the Investment Policy Statement (IPS) which of the following is a constraint: 1 2 3 4 Risk Return Liquidity Standard deviation. 9. Shares A, B and C each have the same expected return and standard deviation. The following table shows the correlations between the returns on these shares. Correlation of Share Returns Share A Share A + 1.0 Share B - 0.8 Share C - 0.3 Share B Share C + 1.0 -1.4 + 1.0 Given these correlations, the portfolio constructed from these shares having the lowest risk is a portfolio: 1 2 3 4 Equally invested in shares B and C. Equally invested in shares A and B. Equally invested in shares A and C. Totally invested in shares C. Use the information in the table below to answer question 10 - 12 Portfolios Expected Return Standard deviation Beta ABSA shares FNB shares Market 10% 12% 9% 8% 15% 7% 1.3 1.4 1 The risk-free rate is 7% -13- 10. Calculate the Treynor ratio for ABSA and FNB shares respectively? 1 2 3 4 2.31% 2.14% 2.00% 2.00% 3.57% 2.30% 1.16% 1.00% 11. The Jensen Alpha on ABSA and FNB shares respectively is closest to: 1 2 3 4 0.023 0.010 0.004 0.001 0.775 0.570 0.022 0.010 12. Which of the portfolios has the highest return after adjusting for systematic risk? 1 2 3 4 FNB shares. ABSA shares. Market portfolio. Adjusted returns are the same for all the portfolios. 13. An individual investor's investment objectives should be expressed in terms of: 1 2 3 4 Liquidity needs and return. Risk and capital market expectations. Risk and return. Tax factors and legal and regulatory constraints. 14. The correlation coefficient of Security X's returns and Security Y's returns is 0.22, and the variance of Security X's returns is 44% and the variance of Security Y's returns is 33%. The covariance of the security X and Y is closest to: 1 2 3 4 20.00 16.27 9.00 8.38 15. Which performance measure(s) contend(s) that unique risk should theoretically be non-existent in a completely diversified portfolio and performance evaluation should thus only focus on the portfolio's un-diversifiable systematic risk. 1 2 3 4 Treynor Sharpe Jensen Sharpe and Jensen UNISA 2016 -14