Investments Math Problem Example | Topics and Well Written Essays - 1000 words

Investments - Math Problem Example(iii) Estimating factor premia.If any on do it nicely he/she nookie aim a better stock for enthronization to make lot of silver. But these identification and estimation is itself a tough task.Part C firmnessIf we let the cat out of the bag about portfolio risk options profession counts a lot more versatile than futures craft and the main reason behind it is a profit in alone direction can be created by using option st sendgies. But if we look at the future trading it is single directional that is the direction of money id directly proportional to the direction of the stock price. So we can say that futures trading is one of the important risk management tool and at the aforesaid(prenominal) time a speculative technique whereas options trading involves a strategic investment on its own. Hence we can say that both trading instruments can place themselves in every well diversified portfolio for the investor.Question 5 Part A(a) AnswerAs we kno w that,According to CAPM,Where,R(i)=Expected rate of returnR(f)= Risk free rate of returnR(m)= Market rate of return=betaSo,Hence the expected rate of return=12%(b) Answer The expected rate of return with =0 is equals to the risk free rate of return.(c) AnswerAccording to CAPM,Now as the share will be interchange of after 1 year,Value of share price after one year=$41Expected dividend=$3Hence,Hence the share is underpriced.Part BAs we can intoxicate from the graph here the x-axis represents the portfolio return and the y-axis represents the risk factor. Portfolio cant be expected above this efficient frontier line. At the lower take aim we can see that a low risk represents lower return, medium risk medium return and high risk high return.Question 6 Part A (a) AnswerAs we know that So,(b) Answer The revised... If we talk about portfolio risk options trading looks a lot more versatile than futures trading and the main reason behind it is a profit in all direction can be created by using option strategies. But if we look at the future trading it is single directional that is the direction of money id directly proportional to the direction of the stock price.So we can say that futures trading is one of the important risk management tool and at the same time a speculative technique whereas options trading involves a strategic investment on its own. Hence we can say that both trading instruments can place themselves in every well diversified portfolio for the investor.As we can see from the graph here the x-axis represents the portfolio return and the y-axis represents the risk factor. Portfolio cant be expected above this efficient frontier line. At the lower level we can see that a low risk represents lower return, medium risk medium return and high risk high return.Supportive argument The manager performance moreover reflects in the return of the portfolio. i.e. when manager perform well the portfolio will also perform well.