Fin550 fin560 Chap 4 4. You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of $56. Your broker tells you that your margin requirement is 45 percent and that the commission on the purchase is $155. While you
Fin-Acc-Boss
qweek_2_homework.xlsxSheet1
| Q 1 | Computation of the abnormal rates of return | |
| Abnormal rate of return ARit=Rit-Rmt | ||
| Stock B = 11.5%-4% = 7.5% | ||
| Stock F = 10%-8.5% = 1.5% | ||
| Stock T = 14%-9.6% = 4.4% | ||
| Stock C = 12%-15.3% = -3.3% | ||
| Stock E = 15.9% - 12.4% = 3.5% |
Sheet2
| Q 2 | Stock | βi |
| B | 0.95 | |
| F | 1.25 | |
| T | 1.45 | |
| C | 0.7 | |
| E | −0.30 | |
| Computation of abnormal rate of returns using the above betas | ||
| Abnormal rate of return ARit=Rit-(βi)Rmt | ||
| Stock B = 11.5%-4%(0.95) = = 7.7% | ||
| Stock F = 10%-8.5%(1.25) = -0.625% | ||
| Stock T = 14%-9.6% (1.45)= 0.080% | ||
| Stock C = 12%-15.3% (0.70) = 1.29% | ||
| Stock E = 15.9% - 12.4%( -0.3)= 19.62% |
Sheet3
| Q 3 | The difference in the abnormal returns in Problem 1 and Problem 2 is caused by the factor of beta. | |
| Stock B, the beta is 0.95, which means that a 1% change in market triggers a 0.95% change of the return on stock and hence the abnormal rate of return is meant to increase | ||
| Stock F, the beta is 1.25%, which causes a significant increase in expected return , and thus decreasing the abnormal rate of return and making it negative | ||
| Stock T, the beta is 1.45%, which is a signficant value that raises the expected return thus causing a decrease in abnormal rate of return | ||
| Stock C, the beta is 0.7% and so the expected return will reduce by a small margin, causing the abnormal return increase significant and assuming a positive value in the process | ||
| Stock E, the beta has a negative value, and therefore the expected return will reduce signficantly, causing the abnormal return to increase | ||
Sheet4
| Q | |||||||
| a. | Company | Merck | Caterpillar | Intel | McDonald’s | General Electric | |
| 10-Jan-18 | 370,770,300 | 18,741,700 | 67,238,700 | 8,699,100 | 8,660,800 | ||
| 9-Jan-18 | 272,335,100 | 13,466,400 | 45,428,700 | 5,413,500 | 7,946,000 | ||
| 8-Jan-18 | 392,441,900 | 16,023,900 | 67,584,000 | 9,494,399 | 11,298,800 | ||
| 7-Jan-18 | 212,285,000 | 15,943,000 | 43,229,200 | 7,465,900 | 8,514,400 | ||
| 6-Jan-18 | 273,316,500 | 15,123,200 | 73,012,800 | 6,153,200 | 8,532,900 | ||
| Average | 304,229,760 | 15,859,640 | 59,298,680 | 7,445,220 | 8,990,580 | ||
| b. | Definitely the difference will have an impact on the efficiency of markets for the above samples. The higher the traded volume of a stock is an indicator of how investors easilyt buy and sell it, which gives it a higher efficiency. Hence, the above samples will have different market efficiency based on their average traded volume of the given stock. | ||||||
| Reference | |||||||
| NYSE. (2017). New York Security Exchange. Retrieved from https://www.nyse.com/index |
Sheet5
| Q 4 | ||
| Beginning Value of Investment = $56.00 x 100 shares = $5,600 Investment = Margin requirement (.45 x $5,600) + Commission ($155) = $2,520 + $155 = $2,675 Ending Value of Investment = $45.00 x 100 = $4,500 Dividends = $2.50 x 100 shares = $250.00 Transaction Costs = $155 + $145 = $300.00 Interest = .08 x (.55 x $5,600) = $246.40 Profit = $5,600 - $4,500 - $250 - $300 - $246.40 = $303.60 Rate of return of $2,675 = $303.60/$2,675 = 11.35% | ||
Sheet6
| Q 5 | ||
| a. | This indicates that I am satisfied with the profit I will accrue from selling my 200 shares at $40 | |
| b. | With the stop loss order in place= ($40 - $25)/$25 = $15/$25*100% = 60% | |
| Without the stop loss order= ($30 - $25)/$25 = $5/$25*100% = 20% | ||
Sheet7
| Q 6 | |
| a. | The annualized rate of return on this investment if you had paid cash |
| Stock Selling Price = $45*300shares= $13500 | |
| Stock Purchase Price = $30*300shares= $9000 | |
| Outstanding Shares = 300 | |
| Annualized Rate of Return = (Selling Price - Purchase Price)/Purchase Price = ($13500 - $9000)/$9000*100% = 50% | |
| b. | Your rate of return with the margin purchase |
| Total cost of shares bought= 300 shares* $30= $9,000 | |
| Cash investment= 60 percent of cost of shares bought= 0.6*$9000= $ 5400 | |
| Total sales amount= 300shares*$45=$13500 | |
| Rate of return with margin purchase= (Total sales amount- total cost of shares)/ Cash investment* 100 = ($13500-$9000)/$5400*100 = 83.33% | |
Sheet8
| Q 7 | ||
| a. | Ignoring commissions, what would have been your rate of return on this investment? | |
| Limit buy order at $24 | ||
| Hence when market Stock price drops to $20, the limit order was executable $24 (buy), then the stock price rose back to $36 | ||
| Rate of return on investment= ($36-$24)/$24*100= 50% | ||
| b. | What would be your rate of return if you had put in a market order? | |
| Market order is order put in place by an investor for the stock to be sold or bought at the best possible price | ||
| In our case, the highest possible price of stock is $36 | ||
| Buy at $28 | ||
| Rate of return = ($36-$28)/$28*100= 28.57% | ||
| c. | What if your limit order was at $18? | |
| Limit buy order at $18 | ||
| With the limit buy order @ $18, and given that the market stock price did not drop to $18, the lowest it dropped was $20, hence the limit buy order could not be executed. | ||
