Financial advisor Joseph Latreur recommends to his client Sabrina, who is willing to take on high risk, the following investment strategy on the Tesla stock (ticker symbol: TSLA): buy 200 shares at a unit price of $ 850 USD and sale of five call option contracts expiring in April at a price of $ 120 USD ($ 12,000 USD per contract). The financial analyst for the brokerage he works for estimated the following probability distribution with respect to the possible prices of the Tesla Inc. stock at the expiration date of the call options in April 2021 (the price of the exercise of the call options is $ 850 USD):
Probability Price
$ 0.15,500
$ 0.649,860
0.20 $ 1,000
0.001 $ 3,000

a) Calculate the maximum loss Fatima could suffer by following the recommendation of counselor Laterror. (1 point)
b) What are the expectations of Advisor: Latreur and his firm's financial analyst regarding Tesla Inc. stock over the next few months? (1 point)
c) What is the main advantage and the main disadvantage of the investment strategy recommended by advisor Laterror? (1 point)
d) Advisor Laterror told Sabrina during a Zoom meeting that the investment strategy he recommends has an expected return that exceeds 30%. Is he right to think so? In order to help Sabrina make an informed decision, calculate the expected return and the risk (standard deviation) of the investment strategy proposed by this advisor?

Answer rating: 100% (QA)

a Fatima could lose a maximum of 12000 if the stock price falls to 0 b The advisor and his firms fin... View the full answer