Question 4

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The current expected return on the Golden Oscar stock is 13%, the riskless rate of interest is 1%, and the return on the market portfolio is 10%.

According to CAPM, what is the current beta of Golden Oscar?
What will be the beta of this security if the covariance of its rate of return with the market portfolio return decreases by 50%?
According to CAPM, what is the new expected return on Golden Oscar?
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Question 5

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Consider the following two mutually exclusive investments:

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Investment

T=0

1

2

3

4

Cash flows A

−$455,000

58,000

85,000

85,000

572,000

Cash flows B

−$65,000

31,000

28,000

25,000

19,000

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Calculate IRRs on both investments.
Find the cross over rate.
Draw the graph, showing how NPVs of these projects depend on their discount rates.
Describe which investment you prefer and in which circumstances
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Question 6

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Mr. Smith wants to construct a protective collar (long stock, long put, short call) on the Daisy Seneca Corporation stock. He owns 100 shares of the stock. The Daisy Seneca stock currently trades for $52 per share. Mr. Smith buys 100 put options on this stock with the strike price of $50 and sells 100 call options with the strike price of $55. Both options expire in 6 months. The annual volatility of returns on Daisy Seneca is 23%. The risk free rate is 2% perannum.

Construct a payoff table for this strategy
Show on the graph how the payoff of this strategy depends on the price of the Daisy Seneca stock
Find the price of the put and call options involved, using the 2-period binomial model
Find the price of these options using the Black Scholes formula
In your opinion, what is the purpose of this strategy?