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PracticeSet2Solns

# PracticeSet2Solns - Finance 261 Practice Set 2...

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Finance 261 Practice Set 2 – Supplementary Examples Solutions 1. To realise a gross profit of \$500 on 200 shares sold short at \$7.50, the investor must cover (ignoring transaction costs): 200(\$7.50) = \$1,500 \$1,500 - X = \$500 profit X is \$1000 which must be divided by 200 shares. The answer is \$5.00 p .s. 80 3 ) 100 50 90 ( = + + 2. a(i) P = o 3 ) 110 45 95 ( + + P = = 83.33 1 (83. ) 33 80 80 r 1 = = 4.16% (ii) t o = (90c x 100) + (50c x 200) + (\$1.00 x 200) = \$390 t = (95c x 100) + (45c x 200) + (\$1.10 x 200) = \$405. 1 390 \$ 390 \$ 405 \$ Return = = 3.85% (b) t o = (90c x 100) + (50c x 200) + (\$1.00 x 200(.7)) = \$330 t 1 = (95c + 10c)100 + (45c + 6c)200 + (110c)200(.7) = \$361 Return = (\$361 - \$330)/\$330 = 9.39% 05 5 . 3. (a) Arithmetic average return of ABC = = 10% 05 5 . Arithmetic average return of XYZ = = 10% (b) Stock XYZ has the greater dispersion around the mean as evidenced by its larger standard deviation (13.33%). (c) ABC: Geometric mean = [ ] ( . ) ( . ) ( . ) ( . ) ( . ) / 12 11 114 105 101 1 1 5 = 9.8%. XYZ: Geometric mean = [ ] ( . ) ( . ) ( . ) ( ) ( . ) / 13 11 118 1 0 92 1 1 5 = 9.2%. 1

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