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You have $10m to invest, and you are considering the returns associated with different trading strategies centering on the S&P 500 index, as well as puts and calls on the index. Currently, the index is trading at 2,449.86.
Strike Call Put
2440 32.00 21.50
2445 29.60 23.10
2450 26.96 25.70
2455 24.10 27.42
You are debating the risks and rewards associated with the following trad- ing strategies:
(a) Compute the return from each strategy as a function of the index price. (Recall that returns are defined as (value of the portfolio at the final date minus cost of the portfolio at the initial date)/(cost of the portfolio at the initial date).)
(b) Which strategy would you deem most risky? Assuming that the index has a positive beta (which it should), what would be the sign of the betas of each of the strategies? Can you rank the trading strategies in terms of their expected returns in a CAPM world?
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