Question
You are considering the results of the following strategies: Alternative 1: Allocate 100% of your wealth to buying stock. Alternative 2: Allocate 93% of your
You are considering the results of the following strategies:
Alternative 1: Allocate 100% of your wealth to buying stock.
Alternative 2: Allocate 93% of your wealth to buying Treasury Bills and the remaining 7% to buying call options on S&P 500 index.
Your wealth is $100
The current price of stock is $100
The call option premium is $7 with an exercise price of 105
Treasury Bill return is 2.5% and its price is $93.
Show your full calculations and show your final results in the following table:
Alternative #1
|
| Alternative #2 | ||||||
Likely Stock Prices at year end | Gain or Loss | ROR |
| Treasury Bill Year-End Results | Call Value at year-end | Portfolio Value at year-end | Gain or Loss | ROR |
100
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
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