Please help with questions 1-5 on the attached document. Thank you!

Finance 201 Modules 3 & 4 Assignment Due: October 10, 2015 Answer all four questions 1. Stock X has an expected return of 8% and Stock Z has an expected return of 12%. The standard deviation of Stock X is 12% and the standard deviation of Stock Z is 8%. Assume that these are the only two stocks available in a hypothetical world. A. If the correlation between the returns of the two stocks is +1: What is the expected return and standard deviation of a portfolio containing 50% X and 50% Z? Will any investor include Stock X in his or her portfolio? Explain why or why not. B. If the correlation between the returns of the two stocks is +0.3: What is the expected return and standard deviation of a portfolio containing 50% X and 50% Z? Will any investor include Stock X in his or her portfolio (if the correlation is +0.3)? If so, what is the maximum amount of Stock X a rational investor might include in a portfolio? Support your answer numerically. 2. Answer two and only two of parts A, B, and C. For the two parts you choose to answer, explain why the italicized statement is true or false (to receive full credit, you must explain why in two or three sentences or with an example). A. The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. The market increased by 10%. If the stock market is efficient, the two stocks must have different Betas. B. Stock A has a standard deviation of 12%; Stock B has a standard deviation of 10%. According to the CAPM, the required return on Stock A must be higher than the required return on Stock B. C. Assuming that the stock market is efficient, an investor cannot double his or her money over the next two years. 3. Elliott Company sold one T-Bill futures contract when the quoted price was 93.25. When the position was closed out, the price of the T-Bill futures contract was 94.12. A. Did interest rates increase or decrease? How do you know? B. What was Elliott's profit or loss from this contract (ignoring transaction costs)? C. Assume that Elliott was speculating, did the company benefit from (or was it hurt by) this transaction? Explain (very) briefly. D. Assume that Elliott was using this contract to hedge. Did Elliott benefit from, or was it hurt by, this transaction? Explain (very) briefly. . 4. Stock ABC and Stock XYZ have the same current price of $50, and they offer the same distribution of future returns (with the same expected return and the same standard deviation). There exists a call option on one share of Stock ABC and a call option on one share of Stock XYZ. The options have identical exercise prices of $49 and they expire on the same date. The call premium on each option is $3. A. B. C. D. E. F. G. H. Are the options currently \"in\" or \"out\" of the money? What is the intrinsic value and the time value of each option today? What is the break-even future stock price associated with the options? What is the net profit or loss associated with purchasing either option if the future stock price is $30. What is the net profit or loss associated with writing either option if the future stock price is $48? What is the net profit or loss associated with writing either option if the future stock price is $51? What is the net profit or loss associated with writing either option if the future stock price is $80? Assume that there is a third call option, based on the average price of Stocks ABC and XYZ, with the same expiration date as the first two options. The exercise price of this option is $49. Should the price (call premium) of the third option be higher than, lower than, or equal to the prices of the two options on the individual stocks in the following two cases? (Briefly explain your answer in each case). The correlation between the returns of the ABC and XYZ is +1 The correlation between the returns of the two stocks is +0.3 5. As the treasurer of Fun R' Us, Inc., you plan to issue $20 million face value of 20 year, 8% coupon corporate bonds in three months. There exists a Treasury Bill futures contract with a delivery date the day before you plan to issue the debt. You are concerned about interest rates over the next three months. To manage this risk, should you buy or sell the (appropriate number of) contact? Can you eliminate interest rate risk using this futures contract? Why or why not