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Unformatted text preview: USC - MARSHALL SCHOOL OF BUSINESS FBE 441 Investments P. Matos Spring 2010 Solutions to Homework Assignment #1 1. You sell short 100 shares of Loser Co. at a market price of $45 per share. What is your maximum possible loss? SOLUTION: When you sell short a security, you need to buy it back in the future but there is no limit as to the price at which you buy back the security. Your gain (loss) is the difference between the price at which you sold (bought) the stock at and the price at which you buy (sell) the stock back. So the maximum possible loss of a short sale is unlimited. Technically, one can also default (i.e. walk away) if the stock price goes up. In which case the maximum you can lose is the money you put in (the collateral on the stock loan of $4500). In this case, note that the $4500 is collateral you put together with the $4500 from the short sales proceed to buy back shares at $90/share for total of $9000 (when the cumulative loss is $4500). 2. The investment bank you work for is writing its annual investments newsletter and you are charged with the international markets outlook for next year. To prepare your part, you collect data on yearly returns of World Stocks (WORLD_STOCKS) and those of the US S&P500 portfolio over the last 75 years. The regression equation you run is: r WORLD_STOCKS = a + r SP500 + error The regression produces the following output in Excel: SUMMARY OUTPUT Regression Statistics R Square 0.739 Standard Error 0.094 Observations 75 Coefficients Standard Error T-Stat Intercept 0.0172 0.0125 1.3787 X Variable 1 0.7710 0.0525 14.6943 2.a. What is the regression estimate for the beta of WORLD_STOCKS with respect to the S&P500?...
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- Spring '07