兹维博迪金融学第二版
试题库11TB(1)
-CAL-FENGHAI.-(YICAI)-Company One1
Chapter Eleven
Hedging, Insuring, and Diversifying
This chapter contains 35 multiple choice questions, 10 short problems and 5 longer problems.
Multiple Choice
1. One is said to ________ a risk if reducing one’s exposure to a loss requires giving up the
possibility of a gain, whereas ________ means paying a premium to avoid possible losses.
(a) diversify; hedging (b) insure; hedging (c) hedge; insuring (d) hedge; diversifying
Answer: (c)
2. A(n) ________ insures creditors against losses stemming from a debtor’s failure to make
promised payments.
(a) hedge
(b) credit guarantee (c) option
(d) asset guarantee
Answer: (b)
3. In a forward contract, the price for immediate delivery of an item is termed the ________.
(a) spot price (b) forward price (c) face value (d) long position
Answer: (a)
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4. In a forward contract, the party who commits to sell an item is said to take a ________, and
the party who commits to buy the specified item is said to take a ________.
(a) long position; short position (b) short position, spot position (c) short position; long position (d) long position; spot position
Answer: (c)
5. ________ are traded on organized exchanges.
(a) Forward contracts (b) Futures contracts (c) Options (d) b and c
Answer: (d)
6. A(n) ________ is an agreement between two parties to exchange a series of cash flows at
specified intervals over a specified period of time.
(a) futures contract (b) swap contract (c) option contract (d) credit contract
Answer: (b)
7. The swap contract is equivalent to ________.
(a) a series of forward contracts (b) a series of credit contracts (c) a series of option contracts
(d) a series of diversification contracts
Answer: (a)
8. For a savings bank with customer liabilities that are short-term deposits earning an interest
rate that changes with market conditions, one appropriate hedging strategy might be to roll over short-term bonds. This is termed ________.
(a) a swaps contract (b) an options contract
(c) matching assets to liabilities (d) an insurance contract
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Answer: (c)
9. ________ are limits placed on compensation for particular losses covered under an
insurance contract.
(a) exclusions (b) caps
(c) deductibles (d) copayments
Answer: (b)
10. Life insurance policies pay benefits if an insured party dies, but such policies do not pay
death benefits if the insured person takes his or her own life. This is known as a(n):
(a) exclusion (b) cap
(c) deductible (d) copayment
Answer: (a)
11. ________ create incentives for insured parties to control their losses, and represent the
amount of money the insured party must pay out of his or her own resources before receiving any compensation from the insurer.
(a) exclusions (b) caps
(c) deductibles (d) loan guarantees
Answer: (c)
12. ________ means that the insured party must cover a fraction of the loss.
(a) exclusions (b) caps
(c) copayments (d) loan guarantees
Answer: (c)
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13. A(n) ________ is a contract that obliges the guarantor to make the promised payment on a
loan if the borrower fails to do so.
(a) exclusion
(b) loan guarantee (c) copayment
(d) interest-rate cap
Answer: (b)
14. An interest rate insurance policy which guarantees a maximum interest rate is known as, or
takes the form of ________.
(a) loan guarantee
(b) interest-rate guarantee (c) interest-rate floor (d) interest-rate cap
Answer: (d)
15. ________ protect against losses from a decline in stock prices.
(a) Expiration options (b) Call options (c) Put options (d) Strike options
Answer: (c)
16. The ________ is the fixed price specified in an option contract.
(a) strike price (b) exercise price (c) spot price (d) a and b
Answer: (d)
17. A(n) ________ is the right, but not the obligation, to buy or sell something at an exercise
price in the future.
(a) forward contract (b) option (c) swap
(d) deductible
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Answer: (b)
18. A(n) ________ can be exercised on the expiration date only, whereas a(n) ________ can be
exercised at any time up to and including the expiration date.
(a) American-type option; European-type option (b) European-type option; American-type option (c) European-type option; Asian-type option (d) American-type option; Asian-type option
Answer: (b)
19. You are the Chief Financial Officer of a soybean oil company. In your job you receive dozens
of different proposals each month regarding ways to hedge the company’s exposure to falling soybean oil prices. How do you decide among the different proposals?
(a) Choose the hedge with the best investment bank participating.
(b) Choose the hedge that achieves the desired reduction in risk through the best
insurance policy.
(c) Choose the hedge that minimizes the cost of achieving the desired reduction in risk. (d) none of the above
Answer: (c)
20. Which of the following are ways to avoid losses through insuring?
(a) Lock in a fifteen hundred dollar fare for a holiday airfare.
(b) Agree to purchase an apartment in six months for three hundred thousand dollars. (c) As a soybean grower, enter into a forward contract to sell your soybeans at a fixed
price in a month. (d) none of the above
Answer: (d)
21. Which of the following are ways to avoid losses through hedging?
(a) Pay a premium for healthcare coverage.
(b) Purchase a put option on a stock you do own.
(c) Pay for a credit guarantee on a loan you are worried about collecting.
(d) Enter into a swap to exchange a series of cash flows at specified intervals over a
specified period of time.
Answer: (d)
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22. Which of the following are ways to avoid losses through insuring? 23.
(a) Pay a premium for health care coverage
(b) Purchase a put option on a stock you do own (c) Both a and b (d) Neither a nor b
Answer: (c)
Questions 23-25 refer to the following information:
An old college friend of your invests in cocoa futures and options contracts. He has told you that he believes cocoa prices are escalating. You decide to go ahead and purchase a call option on cocoa with a strike price of $0.80 per pound. That way, if cocoa prices go up, you can exercise the call, buy the cocoa and sell them at a higher spot price.
Assume the price of an option on fifty thousand pounds is one thousand five hundred dollars, and you purchase six options for nine thousand dollars on three hundred thousand pounds.
24. What type of transaction is this for you?
(a) hedged position (b) speculative (c) insured position (d) none of the above
Answer: (b)
25. Calculate the downside risk in dollars and percentage terms.
(a) $1,500; +100% (b) $1,500; –100% (c) $9,000; –100% (d) $9,000; +100%
Answer: (c)
26. If the price increases to $0.85 cents per pound, how much would you net after paying for
the options?
(a) $15,000 (b) $13,500 (c) $9,000 (d) $6,000
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Answer: (d)
27. You are interested in taking a vacation to Yemen next year, but you are worried about the
price of the trip. Over the past three years, the price of a trip to Yemen has ranged between $3,500 and $4,500. The current price is $4,000. You wish to maintain the possibility of a lower price. How would you eliminate the possibility of rising prices, but still maintain the possibility of a gain from lower prices
(a) Purchase an option today from the sponsor, which would allow you to pay the lower
of $4,000 or the market price at the time you take your Yemen vacation.
(b) Purchase an option today from the sponsor, which would allow you to pay the
higher of $4,000 or the market price at the time you take your vacation to Yemen. (c) Leave it to the market.
(d) Arrange a futures contract through the newspaper.
Answer: (a)
Questions 27-30 refer to the following information.
You are Chief Financial Officer of GreenShrimp and you purchase a large quantity of coffee each month. You are concerned about the price of coffee one month from now. You want to guarantee that you will not pay more than $1.60 per pound for fifty thousand pounds. You do not want to pay for insurance, but you do want to lock in a price of $1.60 per pound for fifty thousand pounds.
28. What is the economics of a futures transaction if the spot price on delivery date is $1.35?
(a) Cost of coffee purchased from supplier = $67,500; cash flow from futures contract =
$12,500 paid by GreenShrimp; total outlay = $80,000
(b) Cost of coffee purchased from supplier = $67,500; cash flow from futures contract =
$12,500 paid to GreenShrimp; total outlay = $55,000
(c) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract =
$0 paid to GreenShrimp; total = $80,000
(d) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract =
$12,500 paid to GreenShrimp; total =$92,500
Answer: (a)
29. What is the economics of a futures transaction if the spot price on delivery date is $1.80?
(a) Cost of coffee purchased from supplier = $62,500; cash flow from futures contract =
$12,500 paid by GreenShrimp; total outlay = $80,000
(b) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract =
$0 paid by GreenShrimp; total outlay = $80,000
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(c) Cost of coffee purchased from supplier = $90,000; cash flow from futures contract =
$10,000 paid to GreenShrimp; total outlay = $80,000
(d) Cost of coffee purchased from supplier = $90,000; cash flow from futures contract =
$10,000 paid by GreenShrimp; total outlay = $100,000
Answer: (c)
30. You enter a coffee futures contract at a futures price of $1.60 per pound. What is the
variability of GreenShrimp’s total outlays under the futures contract?
(a) $10,000 (b) $90,000
(c) Outlays are fixed at $80,000 (d) Outlays are fixed at $90,000
Answer: (c)
31. You enter a coffee futures contract at a futures price of $1.60 per pound. At the time of
delivery, coffee is $1.35 per pound. Should you have foregone entering into the futures contract?
(a) You should have consulted an investment bank
(b) You made the right move since your goal was to avoid paying more than $1.60 per
pound
(c) Bad move! You gave up the opportunity to pay a lower price (d) You should have done nothing and left it to the market
Answer: (b)
Use the following information to answer questions 31-33.
You are the Treasurer of Savvy Software, Inc. The U.S., your headquarter country,
accounts for fifty percent of Savvy sales, while thirty percent are in Germany and twenty percent are spread throughout the rest of the world. Over the next six years, you have forecasted that German sales are expected to be 35,170,000 euros each year for the next six years. The current USD/EUR exchange rate is 0.7359 euros to the dollar, and you would be happy for this to remain so during all six years.
32. How can you use a swap contract in this case?
(a) Enter into a swap contract where you agree to receive or pay each year an amount
of cash equal to 35,170,000 euros times the difference between the 0.7359 USD/EUR spot rate and delivery rate at the time.
(b) Enter into a swap contract where you agree to receive or pay each year an amount
of cash equal to 35,170,000 euros times the difference between the 0.7359 USD/EUR forward rate and spot rate at the time.
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(c) Enter into a swap contract where you agree to receive or pay each year an amount
of cash equal to 35,170,000 euros times the spot rate at the time. (d) none of the above
Answer: (c)
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33. What is the notional amount of your swap contract per year? 34.
(a) 477,918,195 EUR (b) 35,170,000 EUR (c) 2,588,160 EUR (d) 0.7359 EUR
Answer: (b)
35. Who might take the opposite side of this swap contract?
(a) Another U.S. company with sales in Germany (b) A German company with sales in the U.S.
(c) Another European company with worldwide sales (d) Another U.S. company with worldwide sales
Answer: (b)
36. The diversification principle states that by diversifying across risky assets people can
sometimes achieve a(n) ________ in their overall risk exposure with ________ in their expected return.
(a) increase; no decrease
(b) increase; a minimal decrease (c) decrease; a minimal increase (d) decrease; no decrease
Answer: (d)
37. The part of portfolio volatility that remains no matter how many stocks are added is
________.
(a) diversifiable risk (b) nondiversifiable risk (c) correlated risk (d) uncorrelated risk
Answer: (b)
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Short Problems
1. Describe the main features of forwards contracts. How do forwards contracts differ from
futures contracts?
Answer:
Main features of forwards contracts:
Two parties agree to exchange some item in the future at a price specified now – this specified price is called the forward price.
The spot price is the price for immediate delivery of the item. No money is paid in the present by either party to the other.
The face value of the contract is the quantity of the item specified in the contract multiplied by the forward price.
The party who commits to buy the specified item is said to take a long position and the party who commits to sell the item is said to take a short position.
A futures contract is essentially a standardized forward contract that is traded on an organized exchange. The exchange interposes itself between the buyer and the seller, so that each has a separate contract with the exchange. Standardization means that the terms of the futures contract are the same for all contracts.
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2. Suppose you are Chief Financial Officer at Beazley Confectionery, Inc. and you purchase a
large quantity of cocoa each month. You are concerned about the price of cocoa one month from now. You want to guarantee that you will not pay more than $0.80 per pound for forty-five thousand pounds. You do not want to pay for insurance, but you do want to lock in a price of $0.80 per pound for forty-five thousand pounds.
(a) Show the economics of a futures transaction for spot prices on delivery date of
$0.70, $0.80, and $0.95.
(b) What is the variability of Beazley’s total outlays under the futures contract? (c) If at the time of delivery, cocoa is $0.70 per pound, should you have foregone
entering into the futures contract Why or why not (d)
Answer: (a) CFO $0.70/lb. $0.80/lb. $0.95/lb. Beazley’s Transactions Cost of $31,500 $36,000 $42,750 cocoa from supplier Cash flow $4,500 paid by $0 $6,750 paid to from futures Beazley Beazley contract Total outlay $36,000 $36,000 $36,000 (b) Outlays are fixed at $36,000.
(c) Regardless of the outcome of the price of cocoa at delivery date, you did the right
thing since your goal was to lock the price in at $0.80 per pound. Although you gave up any opportunity to pay a lower price, you also guaranteed that you would never pay more than $0.80 per pound.
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3. You are a consultant living in the United States and have been engaged by a Japanese
company to perform a project over the next year. The Japanese company is intending to pay you 2,081,300.05 yen per month. The current exchange rate is $0.009609 per yen. However, your concern is that the yen will strengthen versus the dollar and, that as a result, you will receive fewer U.S. dollars each month. The Japanese company is not willing to agree to a fixed exchange rate of $0.009609 per yen; nor does the Japanese company want to come up with dollars to pay you each month. So your next step is to approach a financial intermediary about ways of eliminating your risk.
(a) How do you use swap contracts in this instance to eliminate your risk?
(b) In the third month, if the spot price of the yen is $0.009321,what would your cash
revenues be with the swap contract What would the cash revenues be without the contract (c)
(d) In the ninth month, if the spot price of the yen is $0.010089, what will your cash
revenues be with the swap contract What will your cash revenues be without the swap contract (e)
Answer: (a) On each settlement date you agree to receive or pay an amount of cash equal to
2,081,300.05 JPY times the difference between $0.009609 and the spot price. (b) Without the swap: 2,081,300.05 JPY x $0.009321/JPY = $19,399.80
With the swap: you will receive 2,081,300.05 JPY, which you sell for $19,399.80. You then receive 2,081,300.05 JPY x ($0.009609 – $0.009321) = $599.41 from the counterparty to your swap contract. Total = $19,999.21
(c) Without the swap: 2,081,300.05 JPY x $0.010089/JPY = $20,998.24
With the swap: you will receive 2,081,300.05 JPY, which you sell for $20,998.24. You then pay 2,081,300.05 JPY x ($0.010089 – $0.009609) = $999.03 to the counterparty of your swap contract. Total = $19,999.21
4. Suppose you are interested in an adventure tour to Siberia next year. However, you are
worried about the price of such a trip, which in the past has ranged from $4,500 to $5,500. The current price of such a trip is $5,000.
(a) How could you enter into a forward contract with a tour operator to eliminate your
price risk?
(b) Why would the operator be interested in accepting your forward contract?
Answer: (a) You could enter into a forward contract with a tour operator today with an
agreement to pay $5,000 next year.
(b) The tour operator would be happy to lock in your reservation at the current price of
$5,000 due to a concern that prices may fall below $5,000.
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5. An old college friend of yours invests in coffee futures and options contracts. He has told
you that he believes coffee prices are escalating. You decide to go ahead and purchase a call option on coffee with a strike price of $1.25 per pound. That way, if coffee prices go up, you can exercise the call, buy the coffee and sell them at a higher spot price. Assume the price of an option on fifty thousand pounds is $1,250 and you purchase four options for $5,000 on two hundred thousand pounds.
(a) What type of transaction is this for you?
(b) Calculate the downside risk in dollars and percentage terms.
(c) If the price increases to $1.30 per pound, how much would you net after paying for
the options?
Answer: (a) This is a speculative transaction for you since this is an unhedged position.
(b) In this case, the options expire and are worthless, so the downside risk is $5,000 or
–100%.
(c) You net [($1.30 - $1.25) x 200,000 pounds] – $5,000 = $10,000 – $5,000 = $5,000
6. You are the Treasurer of BlairNotes, Inc. The United States, your headquarter country,
accounts for fifty percent of Blair’s sales, while forty percent are in Switzerland, and the remaining ten percent are spread throughout the world. You expect that Swiss sales are expected to be 36,607,500 Swiss Francs each year over the next six years. The current
exchange rate is 1.25005 Swiss Francs to the U.S. dollar, and you would be happy for this to remain so during the next six years.
(a) How can you use a swap contract in this case?
(b) What is the notional amount of your swap contract per year? (c) Who might be a logical counterparty in this swap contract?
Answer: (a) Enter into a swap contract where you agree to receive or pay each year an amount
of cash equal to 36,607,500 Swiss Francs times the difference between the 1.25005 CHF/USD forward rate and spot rate at the time.
(b) The notional amount is 36,607,500 Swiss Francs per year.
(c) Anyone interested in hedging a possible appreciation in the dollar versus Swiss Franc,
or a Swiss company with sales in the United States.
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7. Suppose you are Chief Financial Officer at Beazley Confectionery, Inc. and you purchase a
large quantity of cocoa each month. You are concerned about the price of cocoa one month from now. You want to guarantee that you will not pay more than $0.80 per pound for fifty thousand pounds. You decide to purchase a call option on fifty thousand pounds with a strike price of $0.80.
(a) Show the economics of purchasing a call for $2,500 for spot prices on the delivery
date of $0.70, $0.80 and $0.95.
(b) If at the time of delivery cocoa is $0.70 per pound, should you have foregone
purchasing the call option Why or why not (c)
Answer: (a) Transaction of Beazley $0.70/lb. $0.80/lb. $0.95/lb. Confectionery Cost of call option –$2,500 –2,500 –$2,500 Cost of cocoa purchased $35,000 $40,000 None Cash flow from exercising None None $40,000 call option Total outlay $37,500 $42,500 $42,500 (c) You did the right thing since you wanted to lock in the price at $0.80 per pound.
Although you ended up spending $2,500 on an option that you did not use, you still save from the lower price.
8. You have just found a home for which you have signed the purchase and sale agreements.
However, you have only a matter of weeks to obtain a mortgage. You have a number of interest rate alternatives available to you. One is to lock in a fixed seven and one-half
percent APR for twenty-five years. Rates are at the moment falling, so another alternative is a twenty-five year variable rate loan which is currently at five percent and which is tied to the six month Treasury bill rate. Another alternative is a variable rate loan that starts at six percent and cannot fall below four percent, but which can increase by only as much as one and one-half percent per year up to a maximum of ten and one-half percent.
(a) Which financing plan would you choose if you wanted to hedge all risk of interest
rate exposure?
(b) For a twenty-five year fixed rate mortgage, what would be your monthly payment
on a loan of one hundred twenty thousand dollars?
(c) If interest rates increased to ten and one-half percent, what would happen to your
monthly payment if you took out a fixed rate mortgage?
Answer: (a) Choose the twenty-five year fixed rate loan. (b) N I PV FV PMT?
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300 0.625 $120,000 0 (b) Your monthly payment would still be $886.79.
PMT = $886.79
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9. You own a coffee plantation and are very concerned about price risk associated with this
commodity. You want to guarantee that you will receive $1.25 per pound in a month regardless of what the spot price is at the time. You are selling three hundred thousand pounds. Suppose you purchase insurance in the form of a put option on three hundred thousand pounds, which guarantees you a minimum of $1.25 per pound. Suppose the option costs you $30,000.
Show the economics of such a transaction if the spot price on delivery date is $1.15 per pound, $1.25 per pound or $1.35 per pound. Under what circumstances would you exercise your option?
Answer: Coffee Plantation’s $1.15/lb. $1.25/lb. $1.35/lb. Transactions Cost of put option –$30,000 –$30,000 –$30,000 Proceeds from sale of None $375,000 $405,000 coffee Cash flow from $375,000 paid to None None exercising put option grower Total receipts $345,000 $345,000 $375,000
10. Discuss the concept of correlation.
Answer: Intuitively, correlation means the degree to which the rates of return on the assets tend to “move together.” Correlation coefficients can range from values of +1 (perfect
positive correlation) to –1 (perfect negative correlation). If the correlation coefficient is 0, the two stocks are said to be uncorrelated. Correlation measures the degree of linear relationship between the returns. If the paired return combination all lie exactly along a straight line the correlation coefficient will be either +1 or –1, depending on whether the line slopes upward or downward.
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Longer Problems
1. Marco owns 500 shares of Omni stocks. Its current price is $75 per share. Discuss how he
can use put options to help protect against losses from a decline in stock prices. If he wants market value insurance on these shares with a deductible of $5 per share and a copayment of 10%, how could he achieve these with Omni put options?
Answer: An Omni put option gives him the right to sell a share of Omni stock at a fixed exercise price, thus insuring him that he will receive at least the exercise price at the option’s expiration date. The put option provides him with protection from losses that stem from a decline in their market price for the period until the expiration date. He can lower the cost of the insurance on the Omni stock by choosing puts with a lower exercise price. If the current stock price is $100 and Marco buys them with an exercise price of $95, then he must absorb the first $5 per share of any loss resulting from a stock price decline. By choosing a put with a lower exercise price, he increases the price of the deductible and lowers the cost of the insurance.
A deductible of $5 means the strike price must be $75 – $5 = $70. A copayment of 10% means that he will only buy puts on 450 shares, rather than the full 500.
2. Suppose you have $15,000 to invest in the biotechnology business. For each drug you invest
in, success means you will quadruple your investment, while failure means you a loss of your entire investment. You decide to invest $5,000 each in three different uncorrelated drugs. Assume that there is a 0.5 probability of success for each drug, and a 0.5 probability of failure.
(a) What are the possible outcomes for this investment scenario? (b) What are the possible payoffs for this investment scenario?
(c) Create a table to display the probability distribution for this investment scenario, including the rate of return for each possible outcome.
Answer: (a) There are a total of four outcomes:
1. all three drugs fail (FFF)
2. only one drug succeeds (FFS, FSF, SFF) 3. only two drugs succeed (FSS, SFS, SSF) 4. or al three drugs succeed (SSS)
(b) There are a total of four possible payoffs:
1. You receive nothing 2. You receive $20,000 3. You receive $40,000 4. You receive $60,000
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(c)
________________________________________________________________________ Outcome Probability (Pi) Payoff (Xi) Rate of Return (ri) No drug succeeds 0.125 0 –100% Only one succeeds 0.375 $20,000 33.34% Only two succeed 0.375 $40,000 166.67%
All drugs succeed 0.125 $60,000 300%
3. Consider the investment scenario from question 2.
(a) Calculate the expected payoff for investing $5,000 each in three uncorrelated drugs. How this compare to the expected payoff of a $15,000 investment in one drug?
(b) Calculate the standard deviation for the investment in three drugs and the standard deviation for a $15,000 investment in one drug.
Answer: (a) Expected payoff for investing $5,000 each in three drugs:
E(X) = 0.125(0) + 0.375($20,000) + 0.375($40,000) + 0.375($60,000) = $30,000
Expected payoff for investing $15,000 in one drug: E(X) = 0.5(0) + 0.5($60,000) $30,000
The expected payoff is $30,000 whether you invest in three drugs or one.
(b) Standard deviation for investing $5,000 each in three drugs:
SD =square root of [0.125(0 – $30,000)2 + 0.375($20,000 – $30,000)2 +0.375($40,000 – $30,000)2 +0.125($60,000 – $30,000)2] = $17,320.50
Standard deviation for investing $15,000 in one drug:
SD =square root of [0.5(0 – $30,000)2 + 0.5($60,000 – $30,000)2] = $30,000
The standard deviation is less when you invest in three stocks than when you invest in one. In fact, the standard deviation continues to decrease as you spread your investment among a greater number of stocks.
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4. Consider the portfolio of drug stocks introduced in question 2. How much should it cost to
insure this portfolio of three stocks
Answer: For each separate drug stock there is a 0.5 chance that you will lose 100% of our investment in that drug. But for the portfolio as a whole there is a probability of only 0.125 that you will lose 100% of your $15,000 investment. If two drugs fail and the third succeeds, then the portfolio is worth $20,000. The cost of an insurance policy on the total portfolio would be the probability of a loss times the magnitude of the loss:
0.125 x $15,000 = $1,875.
5. Discuss the difference between market risk and firm-specific risk.
Answer: An event that affects many firms, such as an unanticipated downturn in general
economic conditions, then many stocks will be affected. The risk of loss stemming from such events is sometimes called market risk. On the other hand, random events that affects the prospects of only one firm, such as a lawsuit, a strike, or a new-product
failure, give rise to random losses that are uncorrelated across stocks and can, therefore, be diversified away. The risk of loss stemming from this kind of even is called firm-specific risk.
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