1. [Valuing a Put Option] Suppose a stock is currently trading for $60, and in one...

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1. [Valuing a Put Option] Suppose a stock is currently tradingfor $60, and in one period will either go up by 20% or fall by 10%.If the one-period risk-free rate is 3%, what is the price of aEuropean put option that exprires in one period and has an exerciseprice of $60?
2. Suppose the uncertainty involves two possible states (0- =1,2) with equal probability 0.5. The investment A produces astate-contingent rate of return 3% at the state 1 and 5% at thestate2. The investment B produces a state-contingent rate of return2% at the state 1 and 8% at the state 2
a. Based on the state-by-state dominance, which investmentproject would you prefer?
b. Based on the mean-variance criterion, which investmentproject would you like better?
c. Which investment project would you rather have? Tell me yourcriterion
3. Consider the following portfolio of two risky assets: theasset 1 with return r1 and the asset 2 with return r2. We invest xdollars in the asset 1 and (1-x) dollars in the asset 2, where0<=x<=1.
a. Calculate the expected value of the portfolio E[rp]
b. Calculate the variance of the portfolio, Var(rp)
c. Based on your findings on the part b. what kind of assets youshould choose when constructing the portfolio.
d. CAPM assets that all investors will hold the optimalportfolio. What is the optimal portfolio in this context?
4. Why do economists use a utility function to present aneconomic agent's preference? Is this utility-based approachplausible?
5. How do we measure risks?

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3.7 Ratings (342 Votes)

You have asked 5 unrelated and different questions in the same post Some of these questions have further sub parts I will address the first question in entirety Please See Answer

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1. [Valuing a Put Option] Suppose a stock is currently tradingfor $60, and in one period will either go up by 20% or fall by 10%.If the one-period risk-free rate is 3%, what is the price of aEuropean put option that exprires in one period and has an exerciseprice of $60?2. Suppose the uncertainty involves two possible states (0- =1,2) with equal probability 0.5. The investment A produces astate-contingent rate of return 3% at the state 1 and 5% at thestate2. The investment B produces a state-contingent rate of return2% at the state 1 and 8% at the state 2a. Based on the state-by-state dominance, which investmentproject would you prefer?b. Based on the mean-variance criterion, which investmentproject would you like better?c. Which investment project would you rather have? Tell me yourcriterion3. Consider the following portfolio of two risky assets: theasset 1 with return r1 and the asset 2 with return r2. We invest xdollars in the asset 1 and (1-x) dollars in the asset 2, where0<=x<=1.a. Calculate the expected value of the portfolio E[rp]b. Calculate the variance of the portfolio, Var(rp)c. Based on your findings on the part b. what kind of assets youshould choose when constructing the portfolio.d. CAPM assets that all investors will hold the optimalportfolio. What is the optimal portfolio in this context?4. Why do economists use a utility function to present aneconomic agent's preference? Is this utility-based approachplausible?5. How do we measure risks?