What is the price of a call option with the same exercise

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Reference no: EM13205688

Assume we have two stocks, A and B. Stock A has expected return 12% and stock B has expected return 15%. The beta for stock A is 0.8 and the beta for B is 1.2. The expected returns of both stocks lie on the SML line.

(a) What is the expected return of the market?
(b) What is the risk-free rate?
(c) What is the beta of a portfolio made of these two assets with equal weights?
(d) Stock A is currently selling for $37 per share. A put option with an exercise price of $45 sells for $8 and expires in four months. If the risk-free rate of interest is 2:3% per year, compounded daily, what is the price of a call option with the same exercise price?

Reference no: EM13205688

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