You wish to buy $12,000 of KOCH stock, but only have $8,000 to invest, so you decide to borrow the remaining $4,000 and buy the stock on margin. Your broker demands a maintenance rate of 25%. The price of KOCH stock falls sharply from $3,000 when you bought it to $1,200, triggering a margin call.

(a) How much cash would you need to deposit into your margin account to meet the margin call?

(b) If instead you decide to deposit securities into your margin account, what is the total value of securities you must deposit?

(c) If instead you decide to liquidate assets from your margin account, what is the total value of stock you need to sell?

The expected return on stocks is 20%, with a standard deviation of 25%. The expected return on silver is 10%, with a standard deviation of 30%.

(a) Silver has a lower expected return and a higher standard deviation of returns. Would anyone choose to hold silver in their portfolio? Explain.

(b) Suppose that we make an additional assumption:

The correlation coefficient between stocks and silver is 1. Would anyone choose to hold silver in their portfolio? Explain. (€) Under the assumption made in part (b), and with the data above on expected returns and standard deviations, could the market possibly be in equilibrium? Explain.

Answer rating: 100% (QA)

Price of amazon share 3000 12000 of amazon stock 120003000 4 shares Your money 8000 borrowed fund 4000 Initial Margin 800012000 6667 maintenance margi... View the full answer