You have just been hired by Jamestown Financial Services (JFS) as an investment adviser. Your boss, Susan Canton, must write a report for an important client, so she has decided to give you “on-the-job training” by asking you to answer the following questions and complete the appropriate computations:
a. What questions would you ask JFS’s client to determine her investment objectives and how to best achieve them?
b. How would you determine the appropriate asset allocation for the client? Under what conditions should the asset allocation be changed?
c. What is a stockbroker, and what role does a broker play in securities transactions?
d. Should JFS recommend that the client use a full-service broker or a discount broker when she trades securities in her portfolio?
e. What types of orders can be placed with a broker? When should restrictions—either time limits or price limits—be used when placing trading orders?
f. Where can JFS’s client get investment and other financial information so that she can stay current with her investment position?
g. One year ago the client inherited a portfolio of stocks. The following table gives information about the inherited stocks:

What return did the client earn on each stock and on the portfolio?
h. JFS’s client wants to compare the returns on her stocks with the market return. JFS generally uses the S&P 500 Index for such comparisons. When the client received her inheritance, the value of the S&P 500 was 1017.01; today, its value is 1080.53. What was the market’s return for the year?
i. The client’s stockbroker has told her that his firm allows margin trading and short selling. Because the client does not know what these investment positions are, explain the concepts of margin trading and short selling so that she can better understand what risks she would be taking by pursuing either position.
j. JFS’s client is quite interested in purchasing MacroTech because she has observed the extraordinary growth experienced by the stock during the past decade. In particular, she wants to know what returns she could earn if she borrowed from her brokerage firm to buy MacroTech. The brokerage firm has an initial margin requirement equal to 60 percent, a maintenance margin of 35 percent, and a broker loan rate of 10 percent. Assume that the client borrows the maximum amount possible from the broker. Also, assume that MacroTech does not pay a dividend.
(1) If she margins, how much can the client invest in MacroTech if she has $18,600 of her own money to invest? How many shares of MacroTech can she buy if the stock price is $100?
(2) If the price of MacroTech stock increases from $100 to $125 over a one-year period, what rate of return would the client earn?
(3) If the price of MacroTech stock decreases from $100 to $90 over a one-year period, what rate of return would the client earn?
(4) What is a margin call? At what price would the client receive a margin call for the MacroTech stock?
(5) If the price of MacroTech drops to $61 and a margin call is issued such that the client must provide enough funds to increase her actual margin to 50 percent, how much money must she give to the broker?
k. JFS’s client is thinking about short selling 200 shares of TNT Fireworks, which is currently selling for $35 per share. TNT does not pay dividends.
(1) If the brokerage firm requires the client to provide a deposit, or “good faith funds,” based on the initial margin requirement, how much money must she give to the broker to short sell TNT?
(2) What will be her dollar return on the short sale position if the price of TNT drops to $28 per share?
(3) What will be her dollar return on the short sale position if the price of TNT increases to $40 per share?
l. If you had to give this client one piece of advice about investing, what would itbe?

  • CreatedNovember 24, 2014
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