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3330%20PS7 - Cornell University Fall 2009 Economics 3330...

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Cornell University Fall 2009 Economics 3330: Problem Set 7 Due 11/20/09 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. The liquidity premium on small stocks offers returns above risk-adjusted levels. b. From an options perspective, if a company takes on additional debt to buy back some of its equity at the market price, then the value of an outstanding share should increase. 2. You are interested in establishing a long position in a company. The stock of the company currently costs $100. A call option with a strike price of 100 that has six months until maturity costs $10. You have $10,000 to invest. The three portfolios you are considering are 1) all stocks, 2) all options, and 3) 100 options and Treasury bills that would pay 4% over the next six months. Complete the following charts with the value of the portfolio.
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