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Value of put options

4. In a world in which your investment choices consist of a risky portfolio and a risk-free asset, the expected return on the former is 15%, and the return on the latter is 10% (which is also your borrowing rate). The standard deviation of the return on the risky portfolio is 20%. If your complete portfolio has a standard deviation of 25%, what are the proportions in which you have allocated your wealth between the risky portfolio and the risk-free asset?

5. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return 10% and a standard deviation of return of 30%. What would the weights of these two securities be in the minimum-variance portfolio consisting of just these two assets?

7. You have just checked the newspaper and learned that zero-coupon government
bonds with maturities ranging from 1 to 5 years currently have the following yields:
6.00%, 7.50%, 7.99%, 8.49%, and 10.70%. If you believed that the expectations theory of the term structure were correct, what would you say that the market expects the oneyear zero rate to be one year from now?

12. You have purchased one Texas Instruments August 75 call at $8.50 and have written one Texas Instruments August 80 call at $6.00. If at expiration, shares of TI were trading at $79, what would be your profit or loss on this position?

13. How could you create an investment position involving a put, a call, and riskless
lending or borrowing that would have the same payoff structure at expiration as a long position in the common stock?

14. The stock of a company currently trades at $100. In the simple world in which we are investing, over the next year, the stock will either rise in price to $160 or decline to $60, with equal probabilities. The risk-free interest rate is 6%. In this world, what would be the value today of a put option that expires in one year with an exercise price of $135?

23. One year ago, you purchased a bond with a par value of $1,000 that had 5 years to maturity. The coupon on the bond is 6%, paid annually, and at the time that you bought the bond, its YTM was 4%. You have just sold the bond after receiving one coupon payment, by which time its YTM had declined to 3%. What was your holding period yield on this investment?

Solution Preview

Please see attached file.

The standard deviation of a risk-free asset's return is zero by definition. That is, its return is certain. Thus its return ...

Solution Summary

See computations and instruction in attached file.