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Olter, Inc. is starting its risk management program for the company and has asked for your help in determining critical risk measurements for the firm. The company has identified several factors in the market that they believe are critical for your tasks:
The risk-free rate is 6%
The required return on the average stock is 13%
Olter’s average return is 13%
Required:
What is Olter’s beta coefficient?
How does the beta coefficient influence the firm’s stock value?
What is the required rate of return for Olter?
In terms of risk, how does Olter compare to the average firm in the market?
If Olter’s beta increased to 1.6, what would you expect to happen to the required rate of return and what does this mean for the firm?
Calculate the value of a call option on the stock in the previous problem with an exercise price of 110. Verify that the put-call parity theorem is satisfied.
A stock has an expected return of 15.9 percent, a beta of 1.70, and the expected return on the market is 10.10 percent. What must the risk-free rate be?
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