b. A risk neutral market maker clears buy and sell orders for a share in a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
b. A risk neutral market maker clears buy and sell orders for a share in a perfectly competitive environment. She believes that there are equal probabilities the share is worth 120 or 80. Traders are drawn randomly from a pool of uninformed traders, who buy with a probability of 50% and sell with a probability of 50%, and informed traders who buy if the share is worth 120 and sell if the share is worth 80. 20% of traders are informed and 80% are uninformed. Work out the initial bid and ask prices. (9 marks) c. Assume that stock returns follow a 2-factor structure. The risk-free return is 4%. Portfolio A has average return 10.5% and factor-betas 0.7 and 0.8 (for factors 1 and 2, respectively). Portfolio B has average return 14.3% and factor-betas 1.3 and 0.6 (for factors 1 and 2, respectively). What is the average return on portfolio C that has factor-betas 0.8 and 1.2 (for factors 1 and 2, respectively)? (9 marks) I (25 marks) b. A risk neutral market maker clears buy and sell orders for a share in a perfectly competitive environment. She believes that there are equal probabilities the share is worth 120 or 80. Traders are drawn randomly from a pool of uninformed traders, who buy with a probability of 50% and sell with a probability of 50%, and informed traders who buy if the share is worth 120 and sell if the share is worth 80. 20% of traders are informed and 80% are uninformed. Work out the initial bid and ask prices. (9 marks) c. Assume that stock returns follow a 2-factor structure. The risk-free return is 4%. Portfolio A has average return 10.5% and factor-betas 0.7 and 0.8 (for factors 1 and 2, respectively). Portfolio B has average return 14.3% and factor-betas 1.3 and 0.6 (for factors 1 and 2, respectively). What is the average return on portfolio C that has factor-betas 0.8 and 1.2 (for factors 1 and 2, respectively)? (9 marks) I (25 marks)
Expert Answer:
Answer rating: 100% (QA)
b To work out the initial and ask prices we need to consider the expected value of the share based o... View the full answer
Related Book For
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Let A, B be sets. Define: (a) the Cartesian product (A B) (b) the set of relations R between A and B (c) the identity relation A on the set A [3 marks] Suppose S, T are relations between A and B, and...
-
Q Ltd prepares accounts to 31 March each year. The company made the following two disposals of chargeable assets during the year to 31 March 2021: (1) 1,250 shares in Hentic Ltd were sold on 28 June...
-
Bordon gathered the following information for inventory at December 31, 2016: Inventory item #XP101; Quantity 100; Unit Cost $50; Market (replacement cost) $49 Inventory item #CD99; Quantity 60; Unit...
-
What are the primary provisions of the 1992 COSO Report? The 2004 COSO Report?
-
Consider the study from Example 3.4. Recall that the clinical trial consists of 450 patients. 150 of the patients have stage I cancer and the rest have stages II-IV cancer. In Computation Lab:...
-
The procedures used for over-the-counter receipts are as follows. At the close of each days business, the sales clerks count the cash in their respective cash drawers, after which they determine the...
-
Figure 3 presents a network where N users are sharing a link of 1 Mbps bandwidth. Users are generating data at a rate of 100 kbps when busy, but are busy generating data only with probability p=0.1....
-
A long vertical drain is going to be made in a soil. Assume the failure plane shown in the figure. The soil is fully saturated. Assume that the lining does not provide any resistance against failure....
-
A 72.1 kg runner has a speed of 4.90 m/s at one instant during a long-distance event. HINT (a) What is the runner's kinetic energy at this instant (in J)? J (b) How much net work (in J) is required...
-
A 0.50-kg particle has a speed of 5.0 m/s at point A and kinetic energy of 7.7 J at point B. (a) What is its kinetic energy at A? J (b) What is its speed at point B? m/s (c) What is the total work...
-
Birch Limited received cash of $24,000 on November 1 as prepayment for 12 months' rent. The accountant recorded the cash receipt as a debit to cash and a credit to Rent Revenue. What is the year-end...
-
A child's ball ( a thin hollow uniform sphere ) of mass 31 . 9 g and radius 0 . 38 4 m starts from rest and rolls without slipping down an inclined plane of vertical height 4 . 7 1 m . What is the...
-
4 Investment Strategies Value Investing Growth Investing Momentum Investing Peso Cost Averaging Link: https://www.investopedia.com/investing/investing-strategies/ QUESTION: From the four investment...
-
Task #3. Find the diagonal angle w of the quadrilateral inscribed into a clock face (circle) with vertices at 2-5-6-10. 12 1 C D C 9 s 8 d A a B 1.
-
Distinguish between the work performed by public accountants and the work performed by accountants in commerce and industry and in not-for-profit organisations.
-
Why is the budget important in public sector reporting?
-
Describe the ways in which the nature of revenue in not-for-profit organizations can differ from the nature of revenue in business enterprises.
-
SEQEA Company was incorporated on January 2, 20X4, and commenced active operations immediately. Common shares were issued on the date of incorporation and no new common shares have been issued since...
-
A construction contract differs from contracts that we generally deal with that focus on an easily defined physical object because the physical object can be examined. How is the object of a...
-
What does the owner contribute to the project and what does the contractor contribute to the project?
-
For what type of project is a line-of-balance schedule particularly suited? Identify specific examples.
Study smarter with the SolutionInn App