EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 21, Problem 5CP
Summary Introduction
To select:
A correct option for the open interest on a futures contract
Introduction:
Open interest refers to the total number of outstanding derivative contracts that have not been settled. For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered 'open'.
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You manage a $19.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio tempo-rarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts.a. Should you be long or short the contracts? Why?b. If your equity holdings are invested in a market-index fund, into how many contracts should you enter? The S&P 500 index is now at 1,950 and the contract multiplier is $50.c. How does your answer to part (b) change if the beta of your portfolio is .6?
Puji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8.
Is there a market premium or market discount? Justify your answer.
Determine the required return of assets J and K. Show your solutions. Interpret your answer.
Graph the Security Market Line for both assets.
Between assets J and K, can you determine which has more total risk and which has more market risk?
Determine which stock has a higher cost of equity capital.
If you are the financial consultant of PIFC, what will be your investment strategy?
Which of the following statements is not correct about the capital allocation line (CAL)?
Question options:
Capital allocation line using the market index portfolio as the risky asset is called the capital market line (CML).
One can achieve the maximum possible return along the capital allocation line by investing 100% in the risky asset.
It is a plot of risk-return combinations available by varying allocation between risky and risk-free assets.
The slope of the capital allocation line is the Sharpe ratio.
Chapter 21 Solutions
EBK INVESTMENTS
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