Question;Practice Problems 51. What is the beta for this stock?Month1234Assume the risk-free rate is 0.Stock XYZ$50$52$50.96$56.056S&P 500-3%1%-.5%2.5%2. A mutual fund manager earns a 15% return in a given year. His beta is 1.4. The S&P 500returned 13%. Treasury bills returned 2%. Did the manager beat the market on a risk-adjustedbasis?3. A share of stock sells for $75 today. It will pay a dividend of $3 per share at the end of the year.Its beta is 0.8. What do investors expect the stock to sell for at the end of the year? Assume therisk-free rate is 2%, and the expected return of the market is 12%.4. If markets become concerned about the possibility of a recession, what will happen to marketrisk premiums?5. Analysts project Boeing (BA) to earn 13% next year. BA has a beta of 1.1, and the market riskpremium is 8%. The risk-free rate is 2%. Is Boeing overpriced, based on analyst forecasts?6. What is alpha in the previous question?7. How will the r-squared of the Fama-French model relate to the r-squared of CAPM (for the samestock)?8. Interpret this regression output based on returns of stock ABC:InterceptSMBHMLSPX-rfCoefficients1.2351.869-1.1471.155StandardError1.2470.6150.5640.336t Stat0.9913.037-2.0323.439P-value0.3240.0030.0440.0019. Discuss the validity of this statement: Beta will be positive when a stocks prices are positivelycorrelated with S&P 500 index levels.10. The post-earnings announcement drift is evidence that markets are not _______-form efficient.11. Discuss the validity of this statement: In an efficient market, a mutual fund manager cannot beatthe market on a regular basis.12. Over a three-year period, the S&P 500 returns 8%, 10%, and 4%. A particular fund managerreturns, net of fees, 9%, 11%, and 6% over the same years. Is this evidence that the manager isskilled? What else could be explaining the consistently higher returns?13. Describe an investment strategy consistent with the belief that markets are efficient (no rightanswer here- it just needs to make sense).14. What is the beta of the SPY ETF?15. Home Depot (HD) recently paid an annual dividend of $1.88. The dividend is expected to growat 3% annually. If the market capitalization rate is 10%, use the constant growth dividenddiscount model to determine the value of HD.16. Extending from the previous question, assume that HD has a plowback ratio of 75%. If HDshares are currently trading at $100, what is the markets perceived valuation of HDs growthopportunities (per share)?17. Oil Wells, Inc., an oil company, is considering an IPO. They plan on issuing 50M shares. Theirmost recent earnings were $14M. You find that the average P/E ratio for similarly-sized oilcompanies is 13.4. Using this information, determine an appropriate share price for Oil Wells,Inc.18. List and describe the common fees associated with mutual funds.19. You are comparing an ETF and a mutual fund for a client looking to invest $100K in a retirementportfolio. The ETF has an expense ratio of 5 bps. The mutual fund has a front-end load of 5%and an expense ratio of 1.5%. Assume the market averages a 10% return over the next 30 years,and that the mutual funds investment performance is similar to the market. What is thedifference in the value of the two investment options after 30 years?20. You purchase a Dec 20 2014 call option on Best Buy (BBY). The option has a strike price of $36and costs $2.93. The current price of BBY is $38. What would the stock price have to be greaterthan to generate a profit?21. You short 5 contracts (contract size=100) of the option in the previous question. Assume theoption is European. What must the stock price be on Dec 20th to generate a profit?22. Again using the option from question 20, you buy 5 European call option contracts. If BBYsstock price ends at $39.50, what is your profit in dollars? What if the price is $40? Whatdifference does the 50 cent increment ($40 vs. $39.50) make on your profit?23. Extending from the previous question, how many shares of BBY stock could you buy (currentprice of $38) for the same cost of the 5 option contracts? How much would you profit on theseshares if the final price was $39.50? $40? Compare the results to the previous question- howmuch of a difference does the additional 50 cents make (going from 39.50 to 40) in terms ofprofits for the stock position vs. the option position?24. What is your profit on the 5 call contracts above if BBYs stock price is $35? What if it is $30?25. You want to use moving averages to purchase a call option. You are considering an up-and-incall option on ABC. Assume the option is issued whenever you choose to buy it. What signalwould you use to know when to purchase this? Based on the theory behind moving averages,would the same strategy work if you had an up-and-out call?26. If the value of the underlying stock goes down, the value of a put option will ____________.27. Use a one-step binomial model to find the value of a European put option. Assume u=1.2 andd=.65. The current stock price is $50, and the strike is $52. The risk-free rate is 2% per year, andthe option matures a year from now.28. Use Black-Scholes to value the option from the previous question. Assume volatility=30%.29. Corn futures for December delivery trade at 373.25 per bushel. A futures contract promisesdelivery of 5,000 bushels and has an 1100 initial margin. If you buy as many contract as possiblefor $50,000, what is your percent profit if the price of corn rises to 373.75 tomorrow?30. The spot price of corn is 360.25. A futures contract guaranteeing delivery of 5,000 bushels ofcorn a month from now costs 365.25. The interest rate is.5% per month. You estimate that youcan store 5000 bushels of corn for a month for $100. Is there an arbitrage opportunity here?What is your profit?
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