1. a) You are buying a share at £10 and for three years the company pays a dividend of £0.5 per year and the stock itself is valued at £12 three years later. What is the annualised rate of return of this share? (15 Marks)
b) Listed below are
estimated covariance matrix for three stocks:
A B C
A 625 - 244 118
B -244 336 225
C 118 225 184
i) Find the correlation coefficient matrix of returns on the securities. (15 Marks)
ii) Find the risk of a portfolio consisting of 30% of A, 60% of B and 10% of C.
6. a) Assume that the current price of ABC share is £50 pounds. The size of one call option is 100 shares. Assuming you short 100 ABC shares and buy 1 European call option on ABC company shares. The call option expires 1 month later and the strike price is £45 per share. The premium is £5 per share.
Calculate your profit and loss in the following cases at the expiration date:
1) ABC share price is £40 pre share
2) ABC share price is £45 pre share
3) ABC share price is £51 pre shre