Questions and Answers of Fundamentals Of Investments Valuation

Review the implied volatility attached to options on Lowe’s (LOW) stock.
a. Look at Table 16.2. Suppose that K = $45 and all other inputs remain the same. What is the price of a call option? What is the price of a put option?b. Look at Table 16.2. Suppose that u = 1.30
In the Black-Scholes option pricing model, the value of an option contract is a function of five inputs. Which of the following is not one of these inputs?a. The price of the underlying stockb. The
Given the inputs to the Black-Scholes option pricing formula provided in Example 16.2, calculate call and put option deltas. The necessary values for d1, N(d1), and N(–d1) were provided in Example
Find the option “Greeks” for an option on General Mills (GIS).
a. Why is it that nothing really changes when there are more than two periods to expiration?b. Why don’t you have to worry about the number of paths the stock price can take before expiration? What
In the Black-Scholes option valuation formula, an increase in a stock’s volatility:a. Increases the associated call option value.b. Decreases the associated put option value.c. Increases or
Consider the following inputs to the Black-Scholes option pricing model:These input values yield a call option price of $6.78 and a put option price of $1.03. Verify these prices from your own
You are managing a $15 million stock portfolio with a beta of 1.1, which you decide to hedge by buying index put options with a contract value of $125,000 per contract and a delta of −.40. How many
a. Using put-call parity and the data in Figure 16.6, at what stock price will the call and the put have the same value?Figure 16.6b. In Figure 16.7, why do the call and the put both have a value of
Which one of the following will increase the value of a call option?a. An increase in interest ratesb. A decrease in time to expiration of the callc. A decrease in the volatility of the underlying
Which one of the following would tend to result in a high value of a call option?a. Interest rates are low.b. The variability of the underlying stock is high.c. There is little time remaining
Which of the following incorrectly states the signs of the impact of an increase in the indicated input factor on call and put option prices?a. Strike price of the option contractb. Time remaining
a. Why do investors care about option deltas?b. Why do you think deltas for call options are positive but deltas for put options are negative?
a. What happens to call and put prices when the price of the underlying stock changes?b. What is the goal of a hedger who uses options?
Increasing the time to maturity of a call option will _____ the price of the option at a(n) _____ rate.a. Increase; increasingb. Decrease; decreasingc. Increase; decreasingd. Decrease; decreasing.
a. In the hedging example in the text, suppose that your equity portfolio had a beta of 1.50 instead of 1.00. What number of SPX call options would be required to form an effective hedge?b.
All else the same, an increase in which of the following will decrease the price of a call option?a. The strike priceb. The price of the underlying stockc. The standard deviation of the underlying
You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio.You have decided to use SPX calls. How many
a. Using the option calculator and the data in the nearby Work the Web, what is the implied standard deviation when the call option market price is $8 instead of $7? $6 instead of $7? What do you
All else the same, as the value of an option used to hedge an equity portfolio increases, the number of options needed to hedge the portfolio:a. Increases.b. Decreases.c. Will not
Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and
a. What are the key differences between a traded stock option and an ESO?b. What is ESO repricing? Why is it controversial?c. If you terminate your employment at The Gap, Inc., how long do you have
You wish to hedge a $5 million stock portfolio with a portfolio beta equal toThe hedging index call option has a delta equal to .5 and a contract value equal to $100,000. Which of the following
You wish to hedge a $10 million stock portfolio with a portfolio beta equal to 1. The hedging index put option has a delta equal to −.5 and a contract value of $200,000. Which of the following
Which of the following provides the best economic interpretation of implied volatility for an underlying stock?a. Implied volatility predicts the stock’s future volatility.b. Implied volatility
You are an employee at L3 Corporation and have just been awarded stock options. The options have a vesting period of five years and an exercise price of $50. L3 stock has an implied volatility of 22
The implied volatility for an at-the-money call option suddenly jumps from 25 percent to 50 percent. This most likely means that:a. The underlying stock has just paid a dividend.b. The volatility
A call option has an exercise price of $60 and matures in six months. The current stock price is $68 and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
In its 10Q dated February 4, 2022, LLL, Inc., had outstanding employee stock options representing over 272 million shares of its stock. LLL accountants estimated the value of these options using the
Compute Sharpe ratios, Treynor ratios, and Jensen’s alphas for Portfolios A, B, and C based on the following returns data, where M and F stand for the market portfolio and risk-free rate,
a. What is the Sharpe ratio of portfolio performance?b. What is the difference between the Sharpe and Sortino ratios?c. What is the Treynor ratio of portfolio performance?d. What is Jensen’s
Over a recent three-year period, the average annual return on a portfolio was 20 percent and the annual return standard deviation for the portfolio was 25 percent. During the same period, the average
Conduct a regression analysis for the returns of the Fidelity Large Cap Stock Fund (FLCSX) on the S&P 500.
a. Explain the difference between systematic risk measured by beta and total risk measured by standard deviation. When are they essentially the same?b. What is a Sharpe-optimal portfolio? c. Among
The Treynor portfolio performance measure for Portfolio P is:a. 8.18.b. 7.62.c. 6.00.d. 5.33.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each
Assume an investment fund had the following returns (in percent) over the last six years: 6, 12, −3, 8, 2, and 5. What is the Sortino ratio for this investment fund? How does it compare to the
Initiate a performance analysis of the Templeton Global Bond Fund (TPINX).
a. What is the probability of realizing a portfolio return one or more standard deviations below the expected mean return?b. What is the probability of realizing a portfolio return two or more
Download a mutual fund performance model into Excel.
The Jensen’s alpha portfolio performance measure for Portfolio R is:a. 2.4 percent.b. 3.4 percent.c. 0 percent.d. −1 percent.A pension fund administrator wants to evaluate the performance of
Over a three-year period, the average return on a portfolio was 20 percent and the beta for the portfolio was 1.25. During the same period, the average return on 90-day Treasury bills was 5 percent.
Which portfolio has the highest Treynor ratio?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S. common
Over a three-year period, the average annual return on a portfolio was 20 percent and the beta for the portfolio was 1.25. During the same period, the average annual return on 90-day Treasury bills
Which portfolio has the highest Sharpe ratio?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S. common
A fund has a return difference of .8 percent and a tracking error of 5.9 percent. What is the fund’s information ratio?
Which portfolio has the highest Jensen’s alpha?a. Pb. Qc. Rd. S.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager invests only in U.S.
A portfolio has a correlation to the market of .9. What is the R-squared? What percentage of the portfolio’s return is driven by the market? What percentage comes from asset-specific risk?
Suppose you must invest all of your money in only one portfolio from choices A, B, or C as presented in Table 13.1. Which portfolio should you choose?Table 13.1 Investment Performance
Suppose you are considering whether Portfolios A, B, and C presented in Table 13.1 should be included in a broader master portfolio. Should you select one, two, or all three of these portfolios to
Suppose you have the following expected return and risk information for stocks and bonds that will be used to form a Sharpe-optimal portfolio. E(R) = .12 os = .15 E(R₂) = .06 .10 .10 .04 OB Corr
The primary difference between the Sharpe ratio and the Sortino ratio is that the Sortino ratio considers:a. Total volatility.b. Only systematic risk.c. Only upside volatility.d. Only downside
You agree with J. P. Morgan that the stock market will fluctuate and have become concerned with how these fluctuations might affect your stock portfolio. Having read about the VaR method for
Given a data series that is normally distributed with a mean of 100 and a standard deviation of 10, about 99 percent of the numbers in the series will fall within:a. 60 to 140.b. 80 to 120.c. 70
The Ned Kelley Hedge Fund focuses on investing in bank and transportation companies in Australia with above-average risk. The average annual return is 15 percent with an annual return standard
A normal distribution is completely specified by its:a. Mean and correlation.b. Variance and correlation.c. Variance and standard deviation.d. Mean and standard deviation.
A normal random variable is transformed into a standard normal random variable by:a. Subtracting its mean and dividing by its standard deviation.b. Adding its mean and dividing by its standard
The probability that a standard normal random variable is either less than −1 or greater than +1 is:a. 2 percent.b. 5 percent.c. 10 percent.d. 31.74 percent.
The probability that a standard normal random variable is either less than −1.96 or greater than +1.96 is approximately:a. 2 percent.b. 5 percent.c. 10 percent.d. 31.74 percent.
The Value-at-Risk statistic for an investment portfolio states:a. The probability of an investment loss.b. The value of the risky portion of an investment portfolio.c. The smallest investment loss
What is the Sortino ratio for the fund and the market?You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return
What are the sustainable growth rate and required return for Beagle Beauties? Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth
Using the PE, P/CF, and P/S ratios, estimate the 2022 share price for Beagle Beauties.Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your
Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual
Use the information from Problem 29 and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in Problem 29? Why or why not?Problem 29Assume the sustainable
Hank’s Barbecue just paid a dividend of $1.85 per share. The dividends are expected to grow at a 12 percent rate for the next five years and then level off to a 5 percent growth rate indefinitely.
Beagle Beauties is overvalued or undervalued at its current price of around $82? At what price do you feel the stock should sell?Beagle Beauties engages in the development, manufacture, and sale of a
You have been tasked with using the FCF model to value Amara’s Jewelry Co. After your initial review, you find that Amara’s has a reported equity beta of 1.1, a debt-to-equity ratio of .5, and a
Review the news headlines for today’s market.
a. What is the central issue in the market efficiency debate?b. How would you state the efficient markets hypothesis?
Smolira Investment Trust (SIT) runs a retirement account for college professors, with a current market value of $2 billion. Alchemy, Inc., offers to conduct market research in an attempt to sift
Examine Walgreens’ (WBA) recent earnings and the impact of any surprises on its stock price.
a. What is an abnormal return?b. What does it mean to “beat the market”?
You are helping your very rich aunt Molly decide where to invest her portfolio. She is planning to take a 10-year world tour after she invests the bulk of her portfolio. She thinks that picking a
Which of the following assumptions does not imply an informationally efficient market?a. Security prices adjust rapidly to reflect new information.b. The timing of one news announcement is
Identify any transactions recently made by insiders in PayPal (PYPL).
a. What three economic conditions cause market efficiency?b. How would well-capitalized, intelligent, and rational investors profit from market inefficiency?
After lengthy trial and error, you discover a trading system that would have doubled the value of your investment every six months if applied over the last three years. Which of the following
a. What role does information play in determining whether markets are efficient?b. What are the forms of market efficiency?
Assume that on March 15, Trenten Medical received approval for a new drug. Using the data below from February 15 through February 28 as the measurement period, calculate the cumulative abnormal
In discussions of financial market efficiency, which of the following is not one of the stylized forms of market efficiency?a. Strong formb. Semistrong formc. Weak formd. Economic form.
a. What is the driving force behind market efficiency?b. Why does this driving force work?
Which of the following is not considered a problem when evaluating the ability of a trading system to “beat the market”?a. Risk adjustment problemb. Relevant information problemc. Data
a. How is a random walk affiliated with the efficient markets hypothesis?b. What are the possible market price reactions to a news announcement?c. How do researchers use event studies to examine the
Which month of the year, on average, has had the highest stock market returns as measured by a small-stock portfolio?a. Januaryb. Marchc. Juned. December.
The SEC has regulations that prohibit trading on inside information. If the market is _____ form efficient, such regulation is not needed.a. Weakb. Semistrongc. Technicald. Strong.
a. What makes a stock trader an informed trader?b. What traders are considered to be insiders?c. What is the difference between legal insider trading and illegal insider trading?
a. How well do professional money managers perform, on average, against a broad market index?b. What are the implications of this performance for investors?
a. What are the four basic reasons market efficiency is difficult to test?b. What are the implications to investors if markets are efficient?
Which of the following intraday changes in the Dow Jones Industrial Average (DJIA) will trigger a Level 1 circuit breaker?a. 7 percent drop before 3:25 P.M.b. 7 percent drop after 3:25 P.M.c. 7
In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index.
A credit card company states an annual percentage rate (APR) of 12 percent, which is actually a rate of 1 percent per month. What is the EAR?a. 12 percentb. 12.68 percentc. 13.08 percentd. 13.76
A typical credit card may quote an APR of 18 percent. On closer inspection, you will find that the rate is actually 1.5 percent per month. What annual interest rate are you really paying on such a
U.S. Treasury STRIPS maturing in 10 years has a current price of $502.57 for $1,000 of face value. What is the yield to maturity of this STRIPS?a. 7.0 percentb. 7.12 percentc. 8.0 percentd. 8.12
A money market instrument with 60 days to maturity has a quoted ask price of 99, meaning $99 per $100 face value. What are the banker’s discount yield, the bond equivalent yield, and the effective
U.S. Treasury STRIPS with a $1,000 face value maturing in five years has a yield to maturity of 7 percent. What is the current price of this STRIPS?a. $930b. $712.99c. $708.92d. $650.
Suppose the yield on a two-year STRIPS is 7 percent and the yield on a one-year STRIPS is 6 percent. Based on the expectations theory, what will the yield on a one-year STRIPS be one year from now?
Which of the following is a possible explanation of the January effect?i. Institutional window dressing ii. Bonus demand iii. Tax-loss sellinga. I onlyb. I and II onlyc. I and III onlyd. I,
a. What is the day-of-the-week effect?b. What is the amazing January effect?c. What is the turn-of-the-year effect?
Circuit breakers implemented by the NYSE were designed to:a. Reduce the January effect.b. Reduce the effect of technical trading.c. Eliminate program trading.d. Slow a market decline.

Showing 300 - 400 of 813