Stocks & Options


1.  Risk free rate
In the real world, is it possible to construct a portfolio of stocks that has an expected return equal to the risk-free rate? Why?

2.  Questions 6-4 (answer a thru c)
Suppose you owned a portfolio consisting of $250,000 of U.S. government bonds with a maturity of 30 years.
a.   Would your portfolio be riskless?
b. Now suppose you hold a portfolio consisting of $250,000 of 30-day Treasury bills.  Every 30 days your bills mature, and you reinvest the principal ($250,000) in a new batch of bills.  Assume that you live on the investment income from your portfolio and that you want to maintain a constant standard of living.  Is your portfolio truly riskless?
c. Can you think of any asset that would be completely riskless?  What security comes closest to being riskless?  Explain.

3.  Question 7-3
A bond that pays interest forever and has no maturity date is a perpetual bond, also called perpetuity or a consol.  In what respect is a perpetual bond similar to (1) a no-growth common stock and (2) a share of preferred stock?

4.  Question 8-1 (answer a thru c)
Define each of the following terms:
a. Option; call option; put option
b. Exercise value; strike price
c. Black-Scholes option pricing model

Required Text

Brigham and Ehrhardt (2010) Financial Management: Theory and Practice. (13th Ed.) South Western, Thomson Learning, Inc. ISBN: 9781439078099 

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