INVESTMENT ANALYSIS exam

Q1 Question 1 10 Points You short-sell 50 shares of XYZ stock at $100 per share. Your broker's initial margin requirement is 50% of the value of your short position. You put up cash to satisfy the initial margin requirement.

a) What will be your rate of return (after 1 year) if XYZ stock sells at $110 a share? Assume that you do not earn any interest on your funds in the margin account and that the stock pays a dividend of $1.50 a share at the end of the year. b) If the maintenance margin is 40%, how high can the stock price rise before you receive a margin call from your broker? Ignore the dividend (for part b) only).

Q2 Question 2 10 Points The current price of ABC stock is $40 a share. You have $1,000 of your own to invest. You borrow an additional $1,000 from your broker at an interest rate of 8% and invest $2,000 in the stock.

a) If the price of the ABC stock goes up by 10% over the next one year, what will be your rate of return? b) If the maintenance margin is 40%, how low does the stock price have to fall before you receive a margin call from your broker? Ignore the interest on the margin loan (for part b) only).

Q3 12 Points Consider the following where Pt represents price at time t and Qt represents shares at time t:

a) Compute both the initial value (at t = 0) and the final value (at t = 1) of a price- weighted index of X and Y. Also, calculate the return on the price-weighted index (of X and Y) for the period [t = 0 to t = 1]. b) Calculate the return on a market-value-weighted index (of X and Y) for the period [t = 0 to t = 1]. Use the initial and final (market) values

to compute the return. c) Use the replicating portfolio approach to compute the return for the period [t = 0 to t = 1] on both the price-weighted index (from part a) and the market-value-weighted index (from part b).