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KF1.
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- a. Describe how the Black-Scholes Call option formula can be used to make an inference about the variance of the return on a stock. b . Explain how the earnings and dividends approaches to stock valuation are equivalent.A) What does the single index model estimate? B) What is the market risk premium? C) What does Beta show? D) What are all the possible values of Beta and what do they mean?Describe two conditions which will determine whether or not a stock is in equilibrium. Can either of these conditions show the stock is in equilibrium? Please use a numerical example to describe your response.
- 1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the aboveHow GARCH (generalized ARCH model) model is applied to Stock Price Volatility?Briefly explain what the Beta of a stock means. What values can it take and what do these imply? Explain how the beta of a stock is different from the variance as a measure of risk.
- a. Explain how and why an increase in each of the following affects the prices of both call and putoptions, holding all other variables constant: i. The current stock price ii. The strike priceWhat are the three major problems of Markowitz (also called Mean-Variance) portfolio optimization model?What is the random walk hypothesis, and how does it apply to stocks?
- Stocks A and B have the following data. Assuming the stock marketyls efficient and the stocks are in equilibrium, which of the following statements is CORRECT? \table[[,A,BWhen finding the covariance, should 2 stocks be used or can it be calculated using 1 stock and the market returns?3) The return on a stock, in a factor model, in a given period will be related to A) firm-specific events. B) macroeconomic events. C) the error term. D) both firm-specific events and macroeconomic events. E) neither firm-specific events nor macroeconomic events. 4) Assume the index model is valid, what inputs will be required to determine covariance between two assets? A) βk B) βL C) σM D) all of the options E) None of the options are correct.Choose the correct answer with justification.