1. Suppose you short sell 900 shares of AGL Energy and there is a 45% initial margin...
Question:
1. Suppose you short sell 900 shares of AGL Energy and there is a 45% initial margin when the shares are selling at $24 a share. Brokerage commissions are 2% on the purchases, sales, and short sales. Assume there are no other costs or taxes. The price falls to $15 per share and you cover the short at this price. What is your rate of return (in raw decimal form) on this investment?
Answer is 0.7287 (need explanations)
2. Shuying has a mean-variance utility function with a risk-aversion coefficient equal to 2, A=2. She has $50,000 to invest and has identified a risky portfolio with a standard deviation (in raw decimal form) of 0.17 and a Sharpe ratio of 0.37. She will combine an investment in this portfolio with borrowing or lending at the risk-free rate. Shuying's optimal choice will require her to borrow or lend $__________. (Answer in dollars and use negative numbers for borrowing and positive numbers for lending).
Answer is -4,411.76 (need explanation)