There are two stocks listed in the market. The information of the two stocks is given...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
There are two stocks listed in the market. The information of the two stocks is given below: Stock Price at year beginning Forecasted price at year end ($) Forecasted dividend in the year (5) Variance of returns (%) ($) ANZ 50 BHP 80 52 83 3 3 25 36 Three investors: David, Christine and Kevin, each of them has $100,000 of funds to invest in the market respectively. Each of them has different investment strategies such as Margin purchase, short sale and minimum risk portfolio. Required: a. Calculate the expected returns of ANZ and BHP respectively (2 marks) b. David wants to trade the stocks using margin purchase, which requires initial margin ratio of 50% and interest charge of 6%. If David invests all his $100,000 as initial margin to buy one of the stocks to achieve the highest return, which stock should David buy, and what is the maximum total $ return and rate of return achievable on his investment? [Hint: you must correctly decide to buy which stock can achieve maximum return]. (4 marks) c. Christine wants to trade the stocks using short sale, which requires initial margin ratio of 50% and no other fee charge. If Christine invests all her $100,000 as initial margin to short sell one stock and buy the other stock with the proceeds from short sale, what is maximum total $ return and rate of return achievable on her investment? [Hint: you must correctly decide to buy which stock and short which stock can achieve maximum return]. (4 marks) d. Kevin wants to invest his $100,000 in the minimum risk portfolio of the two stocks. The correlation coefficient of returns between the two stocks is assumed as zero. What is the expected rate of return and standard deviation of Kevin's portfolio? (4 marks) e. What are the purposes for margin purchase and short sale respectively? Discuss their risks in comparison with normal trading. (2 marks) There are two stocks listed in the market. The information of the two stocks is given below: Stock Price at year beginning Forecasted price at year end ($) Forecasted dividend in the year (5) Variance of returns (%) ($) ANZ 50 BHP 80 52 83 3 3 25 36 Three investors: David, Christine and Kevin, each of them has $100,000 of funds to invest in the market respectively. Each of them has different investment strategies such as Margin purchase, short sale and minimum risk portfolio. Required: a. Calculate the expected returns of ANZ and BHP respectively (2 marks) b. David wants to trade the stocks using margin purchase, which requires initial margin ratio of 50% and interest charge of 6%. If David invests all his $100,000 as initial margin to buy one of the stocks to achieve the highest return, which stock should David buy, and what is the maximum total $ return and rate of return achievable on his investment? [Hint: you must correctly decide to buy which stock can achieve maximum return]. (4 marks) c. Christine wants to trade the stocks using short sale, which requires initial margin ratio of 50% and no other fee charge. If Christine invests all her $100,000 as initial margin to short sell one stock and buy the other stock with the proceeds from short sale, what is maximum total $ return and rate of return achievable on her investment? [Hint: you must correctly decide to buy which stock and short which stock can achieve maximum return]. (4 marks) d. Kevin wants to invest his $100,000 in the minimum risk portfolio of the two stocks. The correlation coefficient of returns between the two stocks is assumed as zero. What is the expected rate of return and standard deviation of Kevin's portfolio? (4 marks) e. What are the purposes for margin purchase and short sale respectively? Discuss their risks in comparison with normal trading. (2 marks)
Expert Answer:
Answer rating: 100% (QA)
a Expected return for ANZ 5225325 120 or 120 Expected return for BHP 8336336 120 or 120 b For margin ... View the full answer
Related Book For
Managing Business Ethics Making Ethical Decisions
ISBN: 9781506388595
1st Edition
Authors: Alfred A. Marcus, Timothy J. Hargrave
Posted Date:
Students also viewed these finance questions
-
There are two stocks listed on the market. The information of the two stocks are given in the table Both Andrew and Linda have $1,000 of funds to invest in the market. Andrew wants to trade the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Inscribe a detailed paper on RFID Solutions and Standards in the Transportation Industry.
-
Ruiz and his two brothers founded a social club called the Last Snake Inn in 1995. They want to take advantage of a new state law that lets them serve beer, liquor, and wine to their patrons on...
-
Dove Corporation, a calendar year C corporation, had the following information for 2016: Net income per books (after-tax) ..................................... $386,250 Taxable income...
-
A snow-cone machine at an icecream shop costs \(\$ 15,000\). The machine is expected to generate profits of \(\$ 2,500\) each year of its 10-year useful life. At the end of the 10 years, the machine...
-
Fenton Company applied FIFO to its inventory and got the following results for its ending inventory . Cameras 100 units at a cost per unit of ....... $68 DVD players 150 units at a cost per unit of...
-
The number of admissions to all types of hospitals in a country between 1989 and 1996 can be described by the function A(t) = 35.283t2-1053.78t+40,539.967 thousand people where t is the number of...
-
? Dean and Ellen Price are married and have a manufacturing business. They bought a piece of business equipment (7-year personal property) on 4/1/2017 for $50,000. Use half-year convention to...
-
Imagine that you have 10,000 to invest. What would be the combination of Asset A and Asset B that would yield you an expected return of 4%? What is the standard deviation of the portfolio described...
-
Consider this relation schema with 7 attributes (P is abbreviation for patient and D is abbreviation for doctor) Visit = (Date, Pno, Pname, Dno, Dname, Diagnosis, Cost) and this set of 4 functional...
-
A currFutures Contract is an agreement to trade an asset on some future date at a price that is locked in today. ency forward is a customized, written contract between two parties that sets a fixed...
-
Question a In chapter 14, we learn about the fraud triangle. Research the "fraud triangle". Do you think fraud can still occur if one of the elements of the fraud triangle is not present? Explain....
-
Two mining fields, Field A and Field B, of a coal mining company produce Lignite and Bituminous coal. The operating cost per day for Field A and Field B are $55,000 and $45,000, respectively. The...
-
A small object is projected from level ground with an initial velocity of magnitude 18.0 m/s and directed at an angle of 60.0 above the horizontal. Part A What is the horizontal displacement of the...
-
Question 1 When a Total Station is setup in the Circle Left position, the Horizontal readings will increase when the instrument is turned clockwise. True False
-
Use critical values to test the null hypothesis H0: 1 2 = 20 versus the alternative hypothesis H0: 1 2 20 by setting a equal to .10, .05, .01, and .001. How much evidence is there that the...
-
Its hard to be a start-up. To get funding from major venture capitalists with deep pockets requires having a good story. NOTHAM Foodss story had two parts that the companys charismatic founder Daniel...
-
1. What are the benefits and costs of using a common currency for Greece, Germany, and the EU? 2. How do the austerity programs imposed by the bailouts help a Greek firm that exports olive oil? 3....
-
The High Value (HV) chain of discount appliance stores, started in 1988 with the merger of three smaller chains, achieved sales in excess of $28 billion under the respected leadership of its CEO,...
-
Verify the color SU(3) representations for combinations of three or fewer quarks and antiquarks given in Eq. (19.28). Data from Eq. 19.28 qq=303=108 qq 3 3 603, 999 3 3 3 = 36315, qqq 3 3 3 1088 10,
-
Prove that Eq. (19.34) gives the simplest multi-gluon and gluon-quark states that contain an \(\mathrm{SU}(3)\) color singlet in the decomposition. Data from Eq. 19.34 (GG)1: (88)1 (Gqq) : [8 (383)8]...
-
A textile manufacturer is concerned about the strength of cotton yarn. In order to nd out whether fiber length is an important factor in determining the strength of yarn, the quality control manager...
Study smarter with the SolutionInn App