QUESTION ONE

(a) Explain and illustrate graphically the options concept of being:

(i) at the money

(ii) in the money

(iii) out of the money

For both a call and put option.

(b) Explain with the aide of a diagram a protective put buying strategy.

QUESTION TWO

1. The rates of return of stock A and the market portfolio for the 12 months are given below:

Month	1	2	3	4	5	6	7	8	9	10	11	12
Stock A (%)	10	15	18	14	16	16	18	4	4	14	15	14
Market Portfolio (%)	12	14	13	10	9	13	14	7	1	12	4	16

1. Compute the average return of stock A and the market.
2. Determine the variance of the return of stock A and the market.
3. Find the covariance between the return of stock A and the market portfolio.
4. Estimate the beta factor for stock A.

QUESTION THREE

1. The table below shows the performance of two shares A and B under four different economic conditions and their associated probabilities of occurrence:

Economic Condition	Rate of return %	Rate of return %	Probabilities	Probabilities
	A	B	A	B
Growth	18.50	16.50	0.25	0.45
Expansion	12.75	14.00	0.25	0.20
Stagnation	1.25	1.80	0.25	0.20
Recession	-6.00	-4.50	0.25	0.15

Calculate:

1. The expected rate of return for shares A and B.
2. The standard deviation of the returns for shares A and B.
3. The coefficient of variation of returns for shares A and B.
4. Advise an investor on the preferred share.