FINS2624 Exercise 2 Dr. Wesley Deng Instructions: Show all necessary work of your analysis. Only showing answers without necessary detailed work would receive a mark of zero. Either hand written or...

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FINS2624 Exercise 2 Dr. Wesley Deng Instructions: Show all necessary work of your analysis. Only showing answers without necessary detailed work would receive a mark of zero. Either hand written or typed answers are acceptable. The total mark of the exercise is 25. The weight is 4% of the total grade. Q1 (6’) Suppose the risk-free rate is 4% and that you believe in the estimates in the table below. Asset E(r) σ β X 15% 30% 0.5 Y 20% 45% 1.5 M 10% 15% 1.0 a. Are assets X and Y correctly priced, and if not, what are their ?? b. Construct a portfolio that optimally exploits the mispricing. c. How much did the Sharpe ratio of your optimal risky portfolio increase when you took the mispricing into account? Q2 (4’) Which of the following observations would appear to violate the weak form of EMH? Semi-strong form? Strong form? Please explain. a. The average rate of return is significantly greater than zero. b. The correlation between the return during a given week and the return during the following week is zero. c. One could have made superior return by buying stock after a 10% rise in price and selling after a 10% fall. d. One could have made higher-than-average capital gains by buying those stocks with low dividend yields (i.e., dividend/price, and information regarding dividends is normally disclosed in the annual reports). Q3 (5’) You have purchased 10 call option contracts on CBA stock with an exercise price of $60 when the option was quoted at $2.50. The option expires today when the value of CBA stock is $64. What is the net profit or loss on this investment, ignoring all trading costs and taxes? Q4 (10’) Given the following information, what is the value of the corresponding call and put options? Stock price is $45, exercise price (EX) is $50, time to expiry is six months, risk-free rate is 3.25%, standard deviation is 45%.