Consider a binomial tree with two future periods (T=0, 1, 2) in which the return per period on a risky asset can be either 50% (in good state) or -75% (in bad state) with equal probabilities. The risk-free asset yields a return of 5% per period. The price of the risky asset at T=0 is $1. Sheng, an investor, starts at T=0 with an initial wealth of $100. At the beginning of each period, Sheng decides to short sell 20% of his wealth in the risky asset (i.e., w = -20%) and holds his wealth plus the proceed from short selling in the risk-free asset.

1:Calculate Shengs expected holding period return E(HPR) for the entire investment horizon from T=0 to T=2.

2:Explain why Sheng chooses to pursue a short sale strategy. What would be the impacts of a short sale ban on his E(HPR)?