As the Price of a Stock Rises Above the Strike

question 8

True/False

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

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Definitions:

Expected Return

The forecasted amount of profit or loss an investment is likely to generate over a given period.

Beta

A measure of a stock's volatility in relation to the overall market; a beta greater than 1 indicates higher volatility than the market.

SML

The Security Market Line, a graphical representation of the Capital Asset Pricing Model (CAPM) showing the relationship between the expected return of a security and its risk.

CML

The Capital Market Line, representing the risk-return trade-off of efficient portfolios in the capital market theory; it shows the highest return possible for any given level of risk.