EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 1PS
Summary Introduction
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.
Expert Solution & Answer
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.
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Students have asked these similar questions
1.
From the readings above, summarize the
key differences of the markets by completing the table below.
Performance
Markets
Place
Risk
(Index)
Stock market
Bond market
Please be guided by the following questions when completing the table on
the summary of key differences of the markets.
a. Which of the markets is centralized? How about the other?
b. Which of the two has higher risks?
c. What are the indices that can gauge the stock market
performance?
Duration is important in understanding a fixed income portfolio because A. it is used in the capital asset pricing model B. it measures the interest rate sensitivity of a bonds value C. It measures the correlation with a bank's stock price D. It causes contagion
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 II
Chapter 23 Solutions
EBK INVESTMENTS
Ch. 23 - Prob. 1PSCh. 23 - Prob. 2PSCh. 23 - Prob. 3PSCh. 23 - Prob. 4PSCh. 23 - Prob. 5PSCh. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Prob. 8PSCh. 23 - Prob. 9PSCh. 23 - Prob. 10PS
Ch. 23 - Prob. 11PSCh. 23 - Prob. 12PSCh. 23 - Prob. 13PSCh. 23 - Prob. 14PSCh. 23 - Prob. 15PSCh. 23 - Prob. 16PSCh. 23 - Prob. 17PSCh. 23 - Prob. 18PSCh. 23 - Prob. 19PSCh. 23 - Prob. 20PSCh. 23 - Prob. 21PSCh. 23 - Prob. 22PSCh. 23 - Prob. 23PSCh. 23 - Prob. 24PSCh. 23 - Prob. 25PSCh. 23 - Prob. 26PSCh. 23 - Prob. 1CPCh. 23 - Prob. 2CPCh. 23 - Prob. 3CPCh. 23 - Prob. 4CPCh. 23 - Prob. 5CPCh. 23 - Prob. 6CPCh. 23 - Prob. 7CPCh. 23 - Prob. 8CP
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