Determine the effective return on the stock

Assignment Help Financial Management

Reference no: EM131325763

On November 1, an analyst who has been studying a firm called Computer Sciences believes the company will make a major new announcement before the end of the year. Computer Sciences currently is priced at 27.63 and has a beta of 0.95. The analyst believes the stock can advance about 10 percent if the market does not move. The analyst thinks the market might decline by as much as 5 percent, leaving the stock with a return of 0.10 þ (0.05)(0.95) ¼ 0.0525.

To capture the full 10 percent alpha, the analyst recommends the sale of a particular stock index futures. The March contract currently is priced at 393. Assume the investor owns 100,000 shares of the stock.

Set up a transaction by determining the appropriate number of futures contracts.

Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract is at 432.30, and the multiplier is 500. Explain your results.

Reference no: EM131325763

Questions Cloud

Give your opinion of the key future trends in digital crime : Give your opinion of the key future trends in digital crime and digital terrorism. Next, provide one (1) overall strategy that the U.S. could use in order to combat digital crime and digital terrorism

Solve for equilibrium price-equilibrium quantity : Market demand is given by D= 120 - 2.75p. Solve for equilibrium price, equilibrium quantity and the quantity supplied byeach firm.

Analyzes the efficiency of the supply of health services : Based on the scenario and financial data provided by the course Instructor, conduct a financial projection (revenues, expenses, and profit) that analyzes the efficiency of the supply of health services.

Calculate the level of price-output and the amount : Calculate the level of price, output and the amount supplied by each firm that arise inthe equilibrium. Provide a labeled diagram.

Determine the effective return on the stock : Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract is at 432.30, and the multiplier is 500. Explain your results.

Theories of motivation affect criminal justice organizations : Using the Criminal Justice Motivational Theories Matrix, explain how one or more theories of motivation affect criminal justice organizations

Monetary policy is a form of economic policy : Contractionary monetary policy is a form of economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens.

Determine the profit from the transaction : In six months, the portfolio has fallen in value to $8,952,597. The futures price is 68 16/32. Determine the profit from the transaction.

Identify which types of partners the city should focus : You are the city manager of Wet Town, Mississippi. Your community considers its greatest threat to be hurricanes. It is January, and you have only 6 months to help the underresourced emergency management team develop refined plans for preparing fo..

User Account

All Pages