The Ross-Westerfield Bathing Suit Company has a beta of 0.6 and an expected return of 11%. A risk-free asset has a rate of return of 5%. c)Draw a graph showing the security market line. Label the risk-free rate, the expected return of the market, and the expected return of Ross-Westerfield.
Free Response #17 Today Vanessa buys one share of stock for $100, one European call option with an exercise price of $80, and one European put option with an exercise price of $90. The options expire twelve months from today. Vanessa assumes that the effective annual discount rate is 8%. Draw a well-labeled graph that shows the present value of the combination of the three assets as a function of the value of a single share of stock at the options’ expiration date. The vertical intercept should have the value of the combination of the three assets. The horizontal axis should have the value of a single share of stock at the options’ expiration date. Make sure to label your intercepts and other relevant numbers on each axis, where relevant. (Hint: You may want to look at the front page of the test to see a well-labeled graph.) Please note that you need to justify the labels for the graph you provide. Please provide an explanation or math wherever necessary.