Explanation:

Using CAPM with $\beta=1$ :

So the expected spot price in one year is

E[S(1)] = 1300 \times e^{(0.07-0.02)\times 1} = 1300e^{0.05} \approx 1366.7 \approx 1367

The one-year forward price uses the cost-of-carry model:

F(0,1) = 1300 \times e^{(0.04-0.02)\times 1} = 1300e^{0.02} \approx 1326.3 \approx 1326

Therefore, the correct answer is A.

Question-167.1. Assume the current (spot) price of the S&P 500 Index is 1,300 and the dividend yield is 2.0% per annum. The overall market return is 7.0% and the risk-free rate is 4.0% per annum; i.e., the market risk premium (a.k.a., equity risk premium, ERP) is 3.0%. Assume all yields/rates are continuously compounded and that we can use the capital asset pricing model (CAPM) where the index has a beta of 1.0 to predict the expected return of the index. What are, respectively, the expected future spot price in one year, $E[S(1.0)]$ , and the one-year forward price, $F(0, 1.0)$ ?

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MManit

Last updated: April 18, 2026 at 11:32

$E[S(1.0)] = 1,367$ and $F(0, 1.0) = 1,326$

$E[S(1.0)] = 1,394$ and $F(0, 1.0) = 1,326$

$E[S(1.0)] = 1,394$ and $F(0, 1.0) = 1,367$

$E[S(1.0)] = 1,394$ and $F(0, 1.0) = 1,394$

Financial Risk Manager Part 1