PRINCIPLES OF INVESTMENTS

 

 

Question 4

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The current expected return on the Golden Oscar stock is 13%, the riskless rate of interest is 1%, and the return on the market portfolio is 10%.

According to CAPM, what is the current beta of Golden Oscar?
What will be the beta of this security if the covariance of its rate of return with the market portfolio return decreases by 50%?
According to CAPM, what is the new expected return on Golden Oscar?
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Question 5

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Consider the following two mutually exclusive investments:

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Investment

T=0

1

2

3

4

Cash flows A

−$455,000

58,000

85,000

85,000

572,000

Cash flows B

−$65,000

31,000

28,000

25,000

19,000

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Calculate IRRs on both investments.
Find the cross over rate.
Draw the graph, showing how NPVs of these projects depend on their discount rates.
Describe which investment you prefer and in which circumstances
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Question 6

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Mr. Smith wants to construct a protective collar (long stock, long put, short call) on the Daisy Seneca Corporation stock. He owns 100 shares of the stock. The Daisy Seneca stock currently trades for $52 per share. Mr. Smith buys 100 put options on this stock with the strike price of $50 and sells 100 call options with the strike price of $55. Both options expire in 6 months. The annual volatility of returns on Daisy Seneca is 23%. The risk free rate is 2% perannum.

Construct a payoff table for this strategy
Show on the graph how the payoff of this strategy depends on the price of the Daisy Seneca stock
Find the price of the put and call options involved, using the 2-period binomial model
Find the price of these options using the Black Scholes formula
In your opinion, what is the purpose of this strategy?

Sample Solution

Aside from blackbirding, a great number of other hate crimes were perpetrated against the indigenous populations of the South Pacific, in some cases conducted as an orchestrated governmental campaign. When the First Fleet arrived in Botany Bay, Sydney, in 1788, setting in motion a seminal cultural collision. In Australia, this often meant the targeting of Aboriginal communities. Section 116 of the Constitution of Australia dates from 1891 (see appendix C), and it was this section of law that validated the removal of Aboriginal children from their families in the now-famous 1997 case Kruger vs the Commonwealth, known as the ‘Stolen Generation Case’. This term is now broadly applied to the issue of Aboriginal children being taken under the care of the Australian government, and is one of the most contentious issues in Australian politics today. In its 1997 report from the National Inquiry into the Separation of Aboriginal and Torres Strait Islander Children from Their Families, the Australian Human Rights and Equal Opportunity Commission (HEROC) declared the actions of the Australian government to be immoral, and in some circumstances, illegal (appendix D). For many people in Australia today, this case epitomises the mistreatment of the Aboriginal community, as their attempts at legal action rarely see success against the legal might of the Australian government, as well as the British, as, despite Australia gaining its independence in 1901, “the power of the British Crown to disallow Australian legislation remains in our Constitution although it would seem politically impossible to invoke it” . The case is not black and white, as a government study (appendix E) found higher rates of drug and alcohol abuse and smoking with consequent disproportionate representation of Aboriginal people in the criminal justice system. There is therefore some legitimate reason for children being removed from their parents, as supported by Keith Windschuttle in his book The Fabrication of Aboriginal History Volume 3: The Stolen Generations 1881–2008 – “My conclusion is that not only is the charge of genocide unwarranted, but so is the term ‘Stolen Generations’. Aboriginal children were never removed from their families in order to put an end to Aboriginality or, indeed, to serve any improper government policy or program. The small numbers of Aboriginal child removals in the twentieth century were almost all based on traditional grounds of child welfare” (8).

On some occasions, European tensions extended to the South Pacifi

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