Question

You are considering the results of the following strategies:

Alternative 1: Allocate 100% of your wealth to buying stock.

Alternative 2: Allocate 93% of your wealth to buying Treasury Bills and the remaining 7% to buying call options on S&P 500 index.

•        Your wealth is $100
•        The current price of stock is $100
•        The call option premium is $7 with an exercise price of 105
•        Treasury Bill return is 2.5% and its price is $93.

Show your final results in the following table:

Alternative #1				Alternative #2
Likely Stock Prices	Gain or Loss	ROR		Treasury Bill Year-End Results	Call Value at year-end	Portfolio Value at year-end	Gain or Loss	ROR
100
70
130

Answer 1