Midterm_Solutions

Midterm_Solutions - Financial Economics V 3025 Rajiv Sethi...

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Financial Economics V 3025 Fall 2009 Rajiv Sethi 5B Lehman Phone: 854 5140 rs328@columbia.edu Midterm Exam: Solutions 1. An investor with $7000 in her account decides to sell short 200 shares of an asset that is currently priced at $40 per share. What does her balance sheet look like immediately after the trade? Assets Liabilities and NW Cash 15000 8000 Shares owed 7000 Net Worth If the maintenance margin is 50%, how high can the share price rise before she receives a margin call? Solve 15000 200 P 200 P = 0 : 5 to get P = $50 . 2. An investor has access to two risky assets P and Q with the following statistical properties: E ( r p ) = 10% p = 5% ; E ( r q ) = 20% q = 20% : She can combine either of these assets with bills that pay a risk-free rate of 5%. State whether the following statements are true or false, and give reasons. (a) \If the investor prefers P to all combinations of bills and Q , then she must be risk-averse." This is true. There are combinations of bills and Q that have a higher expected return than P . If the investor were risk neutral or risk seeking she would prefer any of these combinations to P: Since she prefers P to all these combinations, she must be risk-averse. (b) \If the investor prefers Q to all combinations of bills and P , then she cannot be risk-averse." This is false. Since Q has a higher expected return than P , some Q to all combinations of bills and P: (c) \The investor’s optimal choice cannot be a portfolio that has weight 4 5 in bills and 1 5 in Q ." This is true. The portfolio has expected return
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Midterm_Solutions - Financial Economics V 3025 Rajiv Sethi...

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