# Chapter 2 - such that 83.333 =(95 45 55/d ⇒ d = 2.340 c...

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Chapter 2 – Answer Key: CFA Problems: 2 & 3 Problem Sets: 9 & 10 CFA Problems: 2) The equivalent taxable yield is: 6.75% / (1 0.34) = 10.23% 3) (a) Writing a call entails unlimited potential losses as the stock price rises. Problem Sets: 9) a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80 At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.333 The rate of return is: (83.333/80) 1 = 4.17% b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 = 83.333 After the split, Stock C sells for 55. Therefore, we need to find the divisor (d)
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Unformatted text preview: such that: 83.333 = (95 + 45 + 55)/d ⇒ d = 2.340 c. The return is zero. The index remains unchanged because the return for each stock separately equals zero. 10) a. Total market value at t = 0 is: (\$9,000 + \$10,000 + \$20,000) = \$39,000 Total market value at t = 1 is: (\$9,500 + \$9,000 + \$22,000) = \$40,500 Rate of return = (\$40,500/\$39,000) – 1 = 3.85% b. The return on each stock is as follows: r A = (95/90) – 1 = 0.0556 r B = (45/50) – 1 = –0.10 r C = (110/100) – 1 = 0.10 The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85%...
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