Corporate Finance End Term: 13 April 2025 (January 2025 term)

Diversification works well if two investment opportunities always move in the opposite direction.

If a project has a negative beta with respect to the market, it means that it tends to go up when market goes down.

Holding everything else constant, risk-averse investors would prefer to pay more for the assets that have higher market betas.

According to capital asset pricing model, risk premia will be proportional to exposure to systematic risk and independent of firm-specific risk.

Security market line graphs a relationship between the expected rate of return of a project and its beta.

Overpriced stocks would lie below the security market line.

The efficient-market hypothesis says that financial markets are effective in processing and reflecting all available information.

The intrinsic value of at-the-money call options is zero.

The value of put option increases with stock price.

A call option has a negative delta while a put option has a positive delta.

A call option holder is obliged to purchase the asset for a specified price on or before the expiration date.

A European option can be exercised before the expiration date.

Financial trilemma states that an economy cannot achieve financial stability, total national control over financial safeguard policy and free capital mobility simultaneously.

An asset is considered safe if it gives the holder different payoffs across a wide variety of possible future scenarios.

Sharpe ratio is defined as the ratio of expected return of the asset to the standard deviation of excess returns.

There is a risky asset that has an expected rate of return of 15% and a standard deviation of 10%. If the risk-free rate of return is 4%, then what is the slope of capital allocation line passing through the given risky asset?

Sarita is considering investing in an opportunity that promises to pay Rs 5,000 in one year, Rs 10,000 in two years and Rs 20,000 in three years. If the prevailing constant rate of return is 10%, then what is maximum price that Sarita should agree to pay for the project? (Round off to the nearest integer)

Suppose that the interest rate at a point of time in Thailand is 9%, and the interest rate at that point of time in China is 4%. What is the expected rate of appreciation of THB to CNY exchange rate at that point of time? (Note: Currency of Thailand is THB and currency of China is CNY)

The price of a one-year European call option on a non-dividend-paying stock with a strike price of Rs 120 is Rs 15. The stock price is Rs 115, and the annual risk-free rate of return is 8% (continuously compounded). What is the price of a one-year European put option on the same stock with a strike price of Rs 120?

Suppose that in the Black-Scholes pricing formula for a put option, we have N(d1)=0.4 and N(d2)=0.7. If the stock price increases by Rs 1, then what will be the change in the price of the put option?

A company has two divisions: production division and sales division. The production division has a beta of 1.2 and the sales division has a beta of 1.8. The production division has the 70% of company’s assets and 30% of company’s assets are in sales division. What is the company’s overall beta?

Suppose the risk-free rate of return is 2% and the expected market return is 10%. If the beta of an asset X is 1.5, then according to CAPM, what is the expected rate of return on asset X?

A risky asset has an expected rate of return of 12% and standard deviation of the rate of return of 20%. If the Sharpe ratio of this risky asset is 0.5, then what is the prevailing risk-free rate of return?

A one-year call option with a strike price of Rs 20 is selling at a call premium of Rs 2. A one-year put option with a strike price of Rs 20 is selling at put premium of Rs 1. The current share price is Rs 22. One year later, the share price increases to Rs 25.

Suppose you take a long position in the stock and write a call option on the stock. This strategy is referred to as

Your opinion is that Akola Inc stock has an expected rate of return of 12%. Akola Inc has a beta of 1.6. The risk-free rate of return is 6%, and the expected market rate of return is 10%. According to the capital asset pricing model

Cisco Inc. has an expected rate of return of 10% and standard deviation of rate of return of 15%. The expected market return is 6% and the standard deviation of market return is 5%. Cisco Inc. has a correlation coefficient with the market of 0.5. Then,

A trader buys a put option on a stock with a strike price of Rs 48 when the option price is Rs 5. The trader makes a profit when the stock price is

The put-call parity states that

Suppose only one variable is change at a time, then the value of a put option increases with

Security A has an expected return of 14% and a standard deviation of 20%. Security B has an expected return of 18% and a standard deviation of 25%. Suppose that the rates of return of the two securities have a correlation coefficient of 0.8. Based on the given information select the correct statements from below.

The current price of a non-dividend-paying stock is Rs 60. Over the next three months, it is expected to rise to Rs 70 or fall to Rs 50. Assume the risk-free rate is zero. A three-month call option with a strike price of Rs 65 is trading at Rs 5. Select the correct statements based on the given information.

A stock is trading at Rs 100 today. In 6 months, the stock price can either increase to Rs 120 or decrease to Rs 90. The six-month risk-free rate is 2%. A six-month call option has an exercise price of Rs 110. Select the correct statements based on the given information.

The current share price of HCL is Rs 600. HCL is expected to pay a dividend of Rs 25 per share next year. The appropriate rate of return is 8% per year and the HCL dividend is expected to grow at a rate of 3% every year. Then, according to Gordon Growth model

Consider a put option and a call option with same strike price and time to maturity. Which of the following statements is correct?