EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 21, Problem 21PS
Summary Introduction
Case summary:
Mr. M is considering preparing delta-hedge strategy for safeguarding the portfolio against uncertainties of market volatility.
Character in this case: Mr. M
Adequate information:
Delta neutral strategy
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What is Put-Call Parity (select the best answer)?
Group of answer choices
Put-Call Parity suggests that puts and calls have equal, but opposite, values.
Uses arbitrage arguments showing that a portfolio of the underlying stock plus a put has the exact same payoffs as a portfolio of a risk-free bond plus a call. Thus, those two portfolios must have equal value.
Uses arbitrage arguments to show that the value of a Put is equal to the value of a Call plus the Stock Price.
Uses arbitrage arguments to show that the value of a Call is equal to the value of the underlying stock plus the value of a Put.
Could a more optimal portfolio, that is, one containing some other combination of stocks that would have either increased returns relative to an increase in risk or maintained returns while decreasing risk, been attained by varying the weight (proportion) of the two securities in the portfolio?
Draw the profit diagram (profit not payoff) of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. Clearly state any assumptions made. Is the cost of the portfolio positive?
Chapter 21 Solutions
EBK INVESTMENTS
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- Explain how the portfolio approach to investment allows the reduction of risk and why Beta therefore is the most appropriate measure of stock risk?arrow_forwardDescribe how a risk-free portfolio can be created using stocks and options. How cansuch a portfolio be used to help estimate a call option’s value?arrow_forwardWhich of the following statements is correct? A delta-neutral portfolio is protected against large changes in the underlying asset price. The delta hedging error increases as gamma decreases. To change the vega of a portfolio, we need to trade the portfolio’s underlying asset. A delta-neutral portfolio needs to be rebalanced more frequently as the gamma increases to maintain delta-neutrality. Please explain and justify your choice using your own words.arrow_forward
- Select all that are true with respect to the historical risk-return tradeoff for portfolios, and for individual stocks. Group of answer choices For portfolios, the relation between risk and return is positive and quite strong For individual stocks, the relation between risk and return is positive and stronger than for portfolios The relation between risk and return is stronger for portfolios than it is for individual stocks You get a better risk-return tradeoff if you put assets together in a portfolioarrow_forwardWhen adding a randomly chosen new stock to an existing portfolio, the lesser (or more negative) the degree of correlation between the new stock and stocks already in the portfolio, the more the additional stock will increase the portfolio's risk. When adding a randomly chosen new stock to an existing portfolio, the lesser (or more negative) the degree of correlation between the new stock and stocks already in the portfolio, the more the additional stock will increase the portfolio's risk. True or Falsearrow_forwardwhich one is correct? QUESTION 6 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. efficient frontier. b. utility curve. c. last frontier. d. efficient portfolio. e. capital asset pricing model.arrow_forward
- As the number of stocks in a portfolio increase, the portfolio’s systematic risk can either increase or decrease. Select one: True Falsearrow_forwardFor each of the statements below, determine if they are TRUE/FALSE and briefly explain why. a) Delta hedging is most difficult for at-the-money options just before their expiration. b) A protective put with a higher strike price provides greater downside protection but lower upside gains. c) A covered call with a lower strike price provides greater downside protection but a lower maximum gain on the upside. d) It is possible to change the Gamma of a portfolio of options by adding the underlying assets to your position. e) You have delta hedged a long call position on a stock. The stock price drops. To maintain your hedge, you need to buy back some shares.arrow_forwardDescribe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.arrow_forward
- Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk of stock Y is 4 then the return on stock Y should be? If the portfolio is well diversified and stocks are strongly negatively related, then the risk for the portfolio will be?arrow_forwardA4) Critically explain the risk premium of a zero-beta stock. Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the risk-free asset?arrow_forwardThe concept of Portfolio Effect indicates that the more assets added to the portfolio, the less risk of the total portfolio Select one: O True O False Ne Jump to... CHAPTER 5-STOCK VALUAarrow_forward
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