ARE143_CHAP_2

ARE143_CHAP_2 - 1 Managerial Economics (ARE) 143 University...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine Chapter 2 Problem 1: (a) What does it mean to purchase a security on margin? Why might you do it? (b) What does it mean to sell a security short? Why might you do it? (c) What is the reason margin requirements exist? (d) What is the difference between asset allocation and security allocation? (e) Are market timing and active asset allocation similar? Explain. (f) Why is street name registration advantageous to investors? Under what circumstances is it required? Problem 2: (a) The XYZ Corporation stock sells for $83 per share, and you have decided to purchase as many shares as you possibly can. You have $13,000 available to invest. What is the maximum number of shares you can buy if the initial margin is 50%? (b) (i) Using the above information, construct your equity account balance sheet at the time of your purchase. (ii) What does your balance sheet look like if the share price reaches $90 share? What is your margin? (iii) What does your balance sheet look like if the share price falls to $65 per share? What is your margin? Problem 3: You purchase 400 shares of ABC stock on margin at a price of $65. Your broker requires you deposit $15,000. (a) What is your margin amount? (b) What is the initial margin requirement? (c) Suppose you sell you stock for $75. If you purchased the stock without margin, what is your return (i) without margin and (ii) without margin? (d)
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ARE143_CHAP_2 - 1 Managerial Economics (ARE) 143 University...

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