Revised Shockley, Chapter 2 Answers:
1. discount rate = 6.75% = 3% + 0.75*(8% – 3%)
securities have the same price. Should State A occur, the long position in
4. a. 50%*$40.00 + 50%*$20.00 = $30.00
5. a. 40%*$40.00 + 60%*$20.00 = $28.00
6. a. Good state: 35%*$10.00 + 25%*$12.00 + 40%*$8.00 = $9.70
7. a. Good state: 40%*$10.00 + 60%*$8.00 = $8.80
8. a. E(Security 1) = 35%*$100.00 + 45%*$100.00 + 20%*$100.00 = $100.00
Beta = (10.37% – 5%) ÷ (14% – 5%) = 0.60
9. a. First, find the expected payoff in the Boom state: 50%*$200.00 +
b. First, find the expected payoff in the Stagnant state: 50%*$100.00 +
c. First, find the expected payoff in the Recession state: 50%*$50.00 +
10. Determine the expected return for each state:
11. a. The conditional mean component of the Boom economy does not change (i.e.
b. The conditional mean component for the Boom economy of the option
12. a. HSTOCK = 1.0 and HRF = -0.50
c. The new simultaneous equations are:
13. The monthly expected return on the bond is calculated by summing the respective
This rate should be very comparable (if not, equal) to the risk-free rate of interest.