Question

1. a. What is the alpha of a security and what is it used to measure or judge?

b. How does the binomial option pricing model improve upon the two-state model?

Answer #1

Note: we are allowed to answer only one indvdual question per post or at most 4 sub parts of same question. Different questions must be posted separately. Thank you!

Ans. The term **Alpha** of a return is frequently
used to denote **the excess return over and above the
benchmark return.** It is the risk-adjusted measure to see
how is security's performance against the overall market. And the
difference between the return of security from the benchmark
represents the alpha whether positive or negative. We often use the
term alpha in portfolio management. Jensen's alpha formula helps us
measure excess return measures by portfolio compared to returns
narrated by CAPM model. (Again the value of excess return may be
+,-,or 0)

According to the capital asset pricing model a, a security with
a _____.
A. zero alpha is considered a good buy
B. negative alpha is considered a good but
C. negative alpha is considered over priced
D. positive alpha is considered overpriced

question 1:
subpart1:
please explain in detail: what is the difference between no
arbitrage pricing model of option and binomial pricing model for
option? if any?
subpart 2:
can you take an example (any previous question which you solved
is also okay) and solve it for both of the models in excel with
formulas?

As an analyst you have gathered the following information:
Security
Expected Standard Deviation
Beta
Security 1
25%
1.50
Security 2
15%
1.40
Security 3
20%
1.60
(i) If
the expected market risk premium is 6% and the risk-free rate is
3%, what will be the required rate of return on each of the above
securities, and which of the security has the highest required
return?
(ii) With
respect to the capital asset pricing model, if expected return for
Security 2...

Suppose that, in each period of a two-period stock price model,
the cost of a security either goes up by a factor of u = 2
or down by a factor d = 1/2. Assume the initial price of
the security is $80 and that the interest rate r is 0.
a). Compute the risk neutral probabilities p (price
moves up) and q = 1−p (price moves down) for this
model.
b). Sketch a diagram of this two period stock...

When doing a descriptive analysis for continuous variable, which
measures are most commonly used:
-a measure of central tendency (mean or median)
-a count of how many people selected each response option
(frequency)
-a measure of dispersion (standard deviation)
-all of the above
-1 & 3
What is the most important reason we do data analysis for
marketing?
-to impress our bosses
-to help improve manager's decision quality
-to turn data into information
-to increase the visual impact of our...

Binomial Model and Option Pricing
The shares of XYZ Inc. are currently selling for $120 per share.
The shares are expected to go up by 10 percent or down by 5 percent
in each of the following two months (Month 1 and Month 2). XYZ Inc.
is also expected to pay a dividend yield of 2 percent at the end of
Month 1. The risk-free rate is 0.5 percent per month.
a. What is the value of
an American call...

1. Generally speaking, how does the Solow Growth Model improve
upon the model of relying on TFP differences to explain growth
across countries?
2. Describe, in your own words, the following terms in the Solow
Growth Model.
(a) Steady state
(b) The Principle of Transition Dynamics
(c) The capital accumulation equation

Galvanometers are used in circuits to measure electrical
signals. a) What two specific measurement devices contain a
galvanometer? What electrical property does each measure? b)
Explain for each measurement device how the galvanometer is
included in the circuit. Should your explanation include the way it
connects to circuit and talk about resistance.

For a given stock, let "a" denote the positive alpha when CAPM
is used as the benchmark model, and let "b" denote the positive
alpha when APT is used as the benchmark model with one of the APT
factors being the Market factor. Which of the following is
true?
a less than or equal b
a greater than or equal b
a+b=1
None of the above

Finance Question - Corporate Finance II - FINC2012 (Option
Question)
8. Security LAL has an annual standard deviation of 30%. The
current stock price is $16 and annual risk-free rate is 4%. What is
the price of a European put option on LAL with an exercise price of
$18 expiring in 3 months. Use the binomial pricing method. A. 2.11
B. 2.08 C. 1.82 D. 2.05 A. a=1.01, u=1.1618, d=0.8607, prob
up=0.4958, prob down=0.5042, price up = 18.59, price down=13.77....

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