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Unformatted text preview: Econ 132A Midterm Exam I A.Sohrabian
Winter 2010 Answer All Questions.
Numerical Problems (74 points) 1. You sold short 300 shares of common stock at $45 per share. The initial margin is
50%. At What stock price would you receive a margin call if the maintenance
margin is 30%. 2. Assume you purchased 200 shares of XYZ common stock on margin at $50 per
share from you broker. If the initial margin is 60%, how much did you borrow
from the broker? ' 3. You purchased 150 shares of ABC common stock on margin at $60 per share.
Assume the initial margin is 56% and the maintenance margin is 25%. Below
what stock price level wouid you get a margin call? 4. You purchased 300 shares of common stock on margin for $60 per share. The
initial margin is 60% and the stock pays no dividend. What wouid your rate of
return be if you sell the stock at $45 per share? 5. Consider the following three stocks. Price Number of shares outstanding
Stock A $60 100
Stock B $70 500
Stock C $20 600 a. What is the priceuweighted index constructed with the three stocks? b. What is the value—weighted index constructed with the three stocks using a
divisor of 100? c. What would the valueweighted index be if sock B is split 2 for 1 and stock C
4 £04 1? 6. A portfolio has an expected rate of return of 0.18 and a standard deviation of 0.20. The riskfree rate (is 4 percent. An investor has the following utility function:
U=E(r) — (A/2)z7' . Which value of A makes the investor indifferent between the
risky portfolio and the riskfree asset? 7. You are considering investing $1000 in a T—bill that pays 0.05 and a risky
portfoiio, P, constructed with 2 risky securities, X and Y. The weights of X and Y
in P are 0.60 and 0.40, respectively. X has and expected rate of return 0f0.14 and a variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of
0.0081. 3. If you desire to form a portfolio with an expected rate of return of 0.1 1,
what percentage of your money must you invest in the Tbill and P,
respectively? b. What would be the dollar value of your position in X, Y, and the Tbills,
respectively, if you decide to hold a portfolio that has an expected
outcome of $1080? True/False Questions (2 points each) 00 10. 11. 12.
13. . The real rate of interest is determined by the expected rate of inﬂation. Initial margin requirements are determined by the Federal Reserve System. You sold ABC stock short at $80 per share. Your losses could be minimized by
placing a limitusell order. Certificate of deposit offers a guaranteed real rate of interest. If stock ABC is selling at $50, a limitbuy order may instruct the broker to buy the
stock if and when the share price falls below $45. In a “ﬁrm commitment” the investment banker agrees to help the ﬁrm sell the
stock at a favorable price. A form of shortterm borrowing by dealers in government securities is banker’s
acceptance. A sale of IBM of new stock to the public would be an initial public offering. A call option allows the buyer to buy the underlying asset at the exercise price on
or before the expiration date. If the nominal return is constant, the aftertax real rate of return increases as the
inﬂation rate decreases. Financial assets permit consumption timing, allocation of risk, separation of
ownership and control, and elimination of risk. The DJ IA is affected equally by changes in low and high priced stocks. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your
maximum possible 1083 is $4500. Econ 132A Winter 2010 A; W 0/? 45C}: Solution to Midterm l A.Sohrabian 5Z9“)? m
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