ISUP 2010
HA HU9B Investment Analysis
Retake and makeup examination assignment
Dr. Paul Eberle
1.
Cisco is selling at $45 a share.
You would like to buy 200 shares for $42 a share
using 60% margin.
Cisco pays no dividends and the interest rate on a margin loan is 6%.
a)
What type of order would you use to buy Cisco at $42?
b)
Assuming your order gets executed for $42, how much money would you have to
put up?
c)
Why would a broker require you to post 60% initial margin when the legal
minimum is currently only 50%?
d)
What type of order would place after buying Cisco for $42 to sell it at $35?
e)
If Cisco does fall to $35 after one year and your order is executed, what was your
return on equity?
2.
Barnes and Noble is selling for $55 a share.
You think it is going to fall to $30 a
share.
a)
What would you do to profit from your expectations and how much would you
make?
b)
After executing your action in A, what type of order would you place to minimize
your loss to approximately $7 a share?
c)
Assuming you used 50% initial margin, what would be the margin call price with
a maintenance margin of 30%?
d)
Carefully explain the difference between a limit buy and a limit sell order?
3.
On January 20, 2010, you short sold 300 shares of ABC.com at the price of $139 per
share. The initial margin requirement is 60% and the maintenance margin is 35%.
The
annual
return on short sale proceeds is 4% and the
annual
return on the initial
margin is 5%.
(a) Determine your
short sale proceeds
.
(b) Compute the
initial margin requirement
.
(c) To what
price
must ABC.com climb for you to receive a margin call?
(d) On February 2, 2010, ABC.com fell to 110.25. What was the
actual margin
in
your account?
(e) Suppose that you closed your account on February 2, 2010. What was the
return
on your investment?
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View Full Document(f) Consider an investor that bought 100 shares of ABC.com on January 20, 2010 and
sold them on February 2, 2010. What was his or her
return
on ABC.com shares?
(g) What does short selling entail? Why might it be the case that as the number of
short sellers increase, the more likely the stock is to rise?
4.
You have decided to invest 40% of your wealth in McDonalds which has an expected
return of 15% and a standard deviation of 15%, and 60% of your wealth in GE which has
an expected return of 9% and a standard deviation of 14%.
a. What is the expected return of your portfolio?
b. If the correlation between McDonalds and GM is 0.5, what is the standard deviation of
your portfolio?
c. If you wanted an expected return of 13%, what percentage should you invest in
McDonalds?
d. Based on your percentages in part c, what would the standard deviation of this
portfolio be?
5.
The table below gives the amount invested and betas for three stocks.
Stock
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 Spring '10
 PaulEberle
 Financial Markets

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