A Stock Priced at $65 Has a Standard Deviation of 30

question 14

Multiple Choice

A stock priced at $65 has a standard deviation of 30%. Three month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27 and the puts cost $1.10. The risk free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued.
-If you wished to construct a riskless arbitrage to exploit the mispriced puts you should ____________.

• A) buy the call and sell the put
• B) write the call and buy the put
• C) write the call and buy the put and buy the stock and borrow the present value of the exercise price
• D) buy the call and buy the put and short the stock and lend the present value of the exercise price

Comprehend the concept of the aggregate demand and aggregate supply curves, and their implications for the economy.

Identify the factors affecting the shape and position of the aggregate demand curve.

Analyze the consequences of shifts in aggregate demand or aggregate supply on the economy's equilibrium.

Recognize the importance of the interest rate, real wealth effect, and investment-savings relationship in determining economic equilibrium.

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Definitions:

Revenue Announcement

Revenue announcement refers to a company publicly disclosing its revenue figures for a specific period, which can impact its stock price and investor perception.

Informationally Efficient

A market characteristic where prices fully reflect all available information, making it impossible to consistently achieve higher returns.

Random Walk

A theory suggesting that stock market prices evolve according to a random path and are therefore unpredictable.

Stock Prices

The cost of purchasing a share of a company, reflecting the market's valuation of that company.