A stock is expected to return 10% when the risk-free rate is 4%. What is the correct discount rate to use for the expected payoff on an option in the real world?
A. 4%
B. 10%
C. More than 10%
D. It could be more or less than 10%
D
The correct answer is D. There is no easy way of determining the correct discount rate for an option's expected payoff in the real world. For a call option the correct discount rate in the real world is often quite high and for a put option it is often quite low (even negative). The example in the text illustrates this.
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The California Transit Authority implemented the Buy American policy when rebuilding portions of the earthquake-damaged San Francisco–Oakland Bay Bridge. The learning from the project was that the policy
a. promotes free trade. b. ensures welfare gains for the nation. c. encourages other nations to follow the Buy American policy. d. yields higher cost for government projects.
In terms of solvency, the larger the number of times interest is earned, the better.
Answer the following statement true (T) or false (F)
What is the importance of title insurance in real property?
What will be an ideal response?
Warren Buffett, the famed stock market investor, recommends
a. buying only when you can calculate a margin of safety based on current assets and earnings b. only buying stock in companies that make products you understand c. fast action and acting on intuition to avoid “paralysis by analysis” d. both “a” and “b”