Apply critical thinking to the following questions:
A. If a security is overpriced relative to its intrinsic value, then what is the relationship between its market capitalization rate and its expected rate of return?
B. A plastics company pays a divident of $1.50 per year, which is expected to grow by 15% for the next two years and 4% thereafter. If the market's required rate of return for this type of firm is 9%, what is the firm's intrinsic value?
You are a portfolio manager at a major investment firm. You have a client portfolio which is up 20% since the start of the year, and the client's objective is to earn 18%.
C. Your forecast contains a high likelihood the market will fall sharply in the near future. Suggest an options strategy in the client's interest and explain why it would be cost effective.
D. There is an election coming up, and the result may cause the market to rise or fall with equal probability. Suggest an options strategy in the client's interest and explain why it would be cost effective.