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FINANCE:
Security Analysis and Portfolio
PART I
You will be analyzing the concep
FINANCE:
Security Analysis and Portfolio
PART I
You will be analyzing the concept of Options. In theory,
Options are supposed to reduce risk (as measured by standard deviation or price
volatility). Yet the pervasive use of
Options in global markets has seemingly increased the price volatility of
financial assets on a marketwide basis. You are tasked with trying to resolve a
seemingly paradoxical situation. In a 1-to-2-page paper, explain this apparent
discrepancy of theory and real-world performance.
PART II
1.) Given the following information, calculate the value of
the Call option using the Black Scholes Model.
S = 14 = Stock Price
X = 16 = Exercise or Strike Price
r = 0.05 = Risk Free Rate
T = 0.25 = Time to Maturity (as a fraction of one year)
N(d1) = 0.1469
N(d2) = 0.1230
2.) If a stock sells for $100 per share, its last dividend
was $1.50 and its growth rate is 5%, what is the stock’s required rate of
return?
3.) (a) Given the following information, calculate the
company’s internal growth rate. Return
on Equity = 30%; Dividend Payout Ratio = 10%.
(b) Please explain the significance of the calculated
internal growth rate in terms of assessing the investment merits of this
company.
4.) Brainteaser / Thought Problem: Options are viewed as
tools for helping to either reduce or hedge against price risk. However, the pervasive use of options is
associated with increased rather than lower price volatility. Please explain this seeming paradox.
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