Concept explainers
To explain: Compare the stock‘s beta value and bond duration to hedge the risk and the difference in calculating a hedge position in each market.
Introduction: To hedge the risk both tools are used. But there is calculation difference, beta value is given by the market index value and bond value is given by the dollar value’s change. Bond duration is the maturity period of the bond or investment.
Answer to Problem 1PS
Beta value is evaluated by index value whereas bond value is calculated by the change in dollar value.
Explanation of Solution
The beta value and bond duration are used to hedge the market risk without affecting the performance of portfolio. These tools provide to compute the gain and loss of the portfolio. The change percentage value used to compute the dollar change value. By using dollar value hedge ratio is calculated. The beta value is calculated with respect to the market index and that change is calculated for the specified market index. If beta value is positive then there is reduction in market portfolio. Here, investors face a loss those have a long position in market.
Bond duration calculation differs from the beta value. Bond value is calculated by the change of dollar value to the portfolio with respect to the future contracts. The value change in dollar gives the hedge ratio of the portfolio.
Want to see more full solutions like this?
Chapter 23 Solutions
EBK INVESTMENTS
- 1. What are beta measures? (a) The volatility of the security (b) The joint volatility of any two securities in a portfolio (c) The volatility of a security divided by the volatility of the market index (d) The relative co-movement of a security with the market portfolio 2. Which of the following statements about a stock's beta is true? I. A beta greater than one is riskier than the market II. A beta less than one is less risky than the market III. A beta less than one is risk-free IV. A beta less than one is undervalued (a) Statement I alone (b) Statement III alone (c) Statements I and III (d) Statements I and IIarrow_forwardWhat is the Security Market Line (SML)? How isbeta related to a stock’s required rate of return?arrow_forwardExplain the term structure of interest rates and the relationships measured? Why is it important for all securities plotted on a given term structure to have equal default risk?arrow_forward
- The table below contains the covariance matrix of stock returns and the market. Assume that the assumptions of CAPM hold. 1. Find the market risk. 2. Find the systematic risk of BlueChip.arrow_forwardDescribe each of the following methods for estimating the cost of equity: (a) the CAPM, (b) DCF,and (c) the bond-yield-plus-risk-premium.Where can you obtain inputs for each of thesemethods, and how accurate are estimates basedon each procedure? Can you state categoricallythat one method is better than the others, or doesthe “best” method depend on the circumstances?arrow_forward2. summarize the key features of the markets with the guide questions below. Features Equity Market Fixed-Income Market Types of Securities Traded Accessibility of the Market Levels of Risk Expected Returns Goals of Investors Strategies Used by Market Participants Example marketsarrow_forward
- 1. Which statement is not true regarding the market portfolio? a.It lies on the efficient frontier.b.All securities in the market portfolio are held in proportion to their market values.c.It is the tangency point between the capital market line and the indifference curve.d.All of the options are true. 2. Which of the following are used by fundamental analysts to determine proper stock prices? I.TrendlinesII.EarningsIII.Dividend prospectsIV.Expectations of future interest ratesV.Resistance levels a.I, IV, and Vb.I, II, and IIIc.II, III, and IVd.All of the items are used by fundamental analysts.arrow_forwardIt is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariances of the securities in the portfolio. What does this mean?arrow_forwardWhat are the differences between stocks and bonds in terms of predicted future payments? Which sort of investment is regarded to be riskier (stocks or bonds)? Given your knowledge, which investment (stocks or bonds) do you believe is often referred to as "fixed income"?arrow_forward
- If market is efficient, in managing an equity portfolio, you will adopt a. Indexing strategy b. Stock rotation strategy c. Security selection strategy d. Market timing strategyarrow_forwardFundamental analysis is a method of______________________________to determine intrinsic value of the stock.a. Measuring the intrinsic value of a security using the market indexb. Using qualitative and quantitative factorsc. Using statistical analysis such as standard deviation, coefficients and probabilitiesd. Using historical price movementse. B and C onlyarrow_forwardIt measures the sensitivity of the return of a security to changes in the return of a common index taken to be a proxy of the market portfolio. A. alpha B. sharpe index C. treynor index D. Betaarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT