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How to replicate the payoff of a bond (riskless portfolio) using shares and call options? Based on this conclusion, how does a single-step binomial tree option pricing model work?
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- Using the Utility Function in Portfolio Management, where the utility function is the constant relative risk aversion utility of wealth function U(W) = W^(gamma)/gamma, set gamma to 0.5 and consider a 50-50 bet on winning 50,000 or getting nothing. What is the certainty equivalent wealth for this bet under these assumptions? Group of answer choices 30,000 10,000 25,000 12,500Why does the limitation of Portfolio analysis is Naively following the prescriptions of a portfolio model may actually reduce corporateprofits if they are used inappropriately?If investors want portfolios with small risk, should they look for investments that have positive covariance, have negative covariance, or are uncorrelated? Does a portfolio formed from the mix of three investments have more risk than a portfolio formed from two?
- In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 ((=0) at 5% and then increases or decreases by 100 basis points every six months. On date 0. the prices of a six-month zero (A) and a 1-year zero (B) are 97.5610 and 95.0908 respectively. a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month. b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).a) Explain the practical relevance of the mean-variance model of portfolio selectionWhat is the Risk-Adjusted Discount Rate Approach?
- compare and contrast the three portfolio management theories: a) Modern Portfolio Theory by Markowitz b) Active Portfolio Management by Grinold & Kahn c) Equilibrium Approach by Black-LittermanWhy are investors’ utility curves important in portfolio theory?Please do not give solution in image formate thanku Question 1- The recent covid19 pandemic had shocked the global economy and investors were scrambling to assess its impact on the market. How would you apply what we learned in the class on economic analysis to tackle this task? Question 2- Compare the two methods of factor portfolio construction and discuss the pro and cons of each method.
- Which statement is true? Always select a portfolio on a person's highest indifference curve, to achieve maximum attainable utility & To achieve the highest utility, select the portfolio where the highest attainable indifference curve is tangential to the efficiency frontier To achieve the highest utility, first choose the best efficiency frontier and then select the highest returns portfolio To achieve the highest utility, select the portfolio where the highest attainable indifference curve is tangential to the efficiency frontier Always select a portfolio on a person's highest indifference rurve, to achieve maximum attainable utility ke Select the portfolio with the lowest risk to achieve maximum utilityUse the utility function u = E(r,) – 0.5 A o? where A is the risk aversion parameter and A = 3.5. Use the average annual return on the S&P 500 as E(r,). Use the average annual interest rate on the US Government 10-year treasury bond over the past decade as rf.! Solve for the investor's optimal allocation between the risky and the risk-free asset.Suppose stock returns can be explained by the following three-factor model: R=RF+ B1F+B2F2-B3F3 Assume there is no firm-specific risk. The information for each stock is presented here: ẞ1 B2 ẞ3 Stock A 1.75 Stock B .82 Stock C .83 .75 $.50 1.35 -.70 -.33 1.44 The risk premiums for the factors are 7.1 percent, 6.3 percent, and 6.7 percent, respectively. You create a portfolio with 20 percent invested in Stock A, 20 percent invested in Stock B, and the remainder in Stock C. The risk-free rate is 4.2 percent. What is the beta for each factor for the return on your portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Factor F1 Factor F2 Factor F3 What is the expected return on your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return %