Suppose that you invest in a stock X which has the following structure: Event Price of Stock
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Question:
Suppose that you invest in a stock X which has the following structure:
Event | Price of Stock X |
Boom(1/2) | 14 |
Bust(1/2) | 8 |
- If you buy the stock at the market price of $10, what is the expected rate of return and the risk (measured in standard deviation of the rate of return) of stock X?
- Now suppose that you buy 2 shares of stock X, after borrowing $10 from a broker at 5% interest rate. What is the expected rate of return of your investment? Remember that your own investment is only $10 after repaying the loan to the broker.
- What is the risk of your investment on 100% margin?
- If you want to enjoy 16% rate of return, what is the proper share of investment on margin?
Related Book For
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty
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