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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