Solution-Calculate the expected return and variance

Calculate the expected return and variance

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Reference no: EM132118153

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Q1. Imagine that a stock is currently trading for $100. The price is expected to go up to $120 or down to $90, in the next year. No other possibilities exist. Assuming the risk- free rate is 10% construct a binomial tree and value a call option on this stock with an expiration of 6 months, and a strike price of $100. Please show all of your work.

Q2. You are considering purchasing 500 call options on the common stock of the big candy store, Inc. The stock is currently trading at $37.10 per share. The 3-month option can be purchased for $2.07 per share, and has an exercise price of 41.00. Assuming the stock is trading at $42.11 at the time of expiration of the option, what is the payoff? What is the profit / loss?

Q3. A. Given the following scenarios based on ABC, Inc. common stock, calculate the Expected Return, Variance, and Standard Deviation of the returns.

Scenario	Probability	HPR(%)
Server recession	0.15	-27
Mid recession	0.15	-11
Normal growth	0.40	10
Boom	0.30	21

B. Assuming we create a portfolio consisting 40% of the above stock. And 60% of bonds with the following possible return. Calculate The Expected Return. Variance, and Standard deviation of the portfolio.

Scenario	Probability	HPR(%)
Server recession	0.15	-9
Mid recession	0.15	12
Normal growth	0.40	8
Boom	0.30	-5

Reference no: EM132118153

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Calculate the expected return and variance

Reference no: EM132118153

Reference no: EM132118153

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