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Repeat Problem on the assumption that the portfolio has a beta of 1.5. Assume that the dividend yield on the portfolio is 4% per annum.
Problem :A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and is worth $360 million. The value of the S&P 500 is 1,200, and the portfolio manager would like to buy insurance against a reduction of more than 5% in the value of the portfolio over the next 6 months. The risk-free interest rate is 6% per annum. The dividend yield on both the portfolio and the S&P 500 is 3%, and the volatility of the index is 30% per annum.
(a) If the fund manager buys traded European put options, how much would the insurance cost?
(b) Explain carefully alternative strategies open to the fund manager involving traded European call options, and show that they lead to the same result.
(c) If the fund manager decides to provide insurance by keeping part of the portfolio in risk-free securities, what should the initial position be?
(d) If the fund manager decides to provide insurance by using 9-month index futures, what should the initial position be?
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A stock has an annual return of 12 percent and a standard deviation of 31 percent. What is the smallest expected loss over the next year with a probability of 5 percent?
Geroge Tanner died October 2, 2014, survived by his son Thomas and his daughter Gigi and her two children. George was the sole stockholder of Tanner Inc., a C corporation. Gigi served as president of Tanner from its inception until early January 2015..
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Javits & Sons' common stock currently trades at $22.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D1 = $1.25), and the constant growth rate is 4% a year. What is the company's cost of common equity if a..
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