Assume you sell short 100 shares of common stock at $70 per share, with initial margin at 55%. The minimum margin requirement is 30%. The stock will pay no dividends during the period, and you will not remove any money from the account before making the offsetting transaction.

Ifthepriceis$86attheendoftheperiod,whatisyourmarginatthatpoint?

Problem 2 (15 marks)

Use the following expectations on stocks X and Y to answer the questions below:

	Bear Market	Normal Market	Bull Market
Probability	0.2	0.5	0.3
Stock X	-20%	18%	50%
Stock Y	-15%	20%	10%

The correlation between stock X and Y is 0.4.

• Assume you invest your $100,000 in a portfolio with $90,000 in stock X and $10,000 in stock Y. What is the standard deviation of your portfolio?

Problem 1 (15 marks) Assume you sell short 100 shares of common stock at $70 per share, with initial margin at 55%. The minimum margin requirement is 30%. The stock will pay no dividends during the period, and you will not remove any money from the account before making the offsetting transaction. 1) If the price is $86 at the end of the period, what is your margin at that point? Problem 2 (15 marks) Use the following expectations on stocks X and Y to answer the questions below: Probability Stock X Stock Y Bear Market 0.2 -20% -15% Normal Market 0.5 18% 20% Bull Market 0.3 50% 10% The correlation between stock X and Y is 0.4. 1) Assume you invest your $100,000 in a portfolio with $90,000 in stock X and $10,000 in stock Y. What is the standard deviation of your portfolio? Problem 3 (15 marks) Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =0.02+0.80RM+eHD R-squared =0.6 RML =-0.03+1.50RM+eML R-squared =0.4 M =0.20 where M is S&P/TSX Comp Index, RX is the excess return of stock X. 1. What is the standard deviation of each stock? Problem 4 (15 marks) FNCE 401v6 Assignment 1 Oct 9/2013 You will be paying $10,000 a year in education expenses at the end of the next two years. Currently the yield curve is flat at 8%. 1. Instead of using a single zero-coupon bond, you prefer to use a one-year T-Bill and a fiveyear zero-coupon bond to fund and immunize your obligation. How much of each security will you buy? Problem 5 (15 marks) Company JUK has a ROE of 25% and the company will not pay any dividend for the next 3 years. It is estimated that the company will pay $2 dividend per share after three years and then to level off to 5% per year forever. The company has a beta of 2. Assume the risk-free interest rate is 4%, and the market risk premium is 8%. 1. What is your estimate of the fair price of a share of the stock? FNCE 401v6 Assignment 1 Oct 9/2013