hi tutor,

pls help me to answer the question.

Stock market around the world is affected by COVID-19 pandemic. As an experienced investor you decide to take the advantage of it. Currently the stock of ABC Ltd. is selling for $40 per share, which was trading at $45 one week earlier and you are certain that the price will fall further. To take the advantage of this downward price momentum you sell short 1000 share of ABC Ltd at the current market price. You want to make $5000 profit from this short selling. You place an order with your broker to purchase the shares at a certain price to cover the position. What type of order did you place with your broker and at what price? Explain why.

(2) (b) Continue from 2(a) above. You borrowed 1000 shares of ABC Ltd from your broker and sell short. Initial margin is 50%. Your broker informs you that a margin call will be issued if your equity falls below $13,500. How much can the price of ABC Ltd rise before you get a margin call? What is the maintenance margin in your account?

(a) There are two tasks in portfolio choice problem: (i) determination of the optimal risky portfolio and (ii) capital allocation. These two tasks are independent, or one is separate from the other. Explain why.

(b) Suppose that the expected return and standard deviation of stock A are 10% and 5% respectively, while the expected return and standard deviation of stock B are 15% and 10% respectively. Returns of stock A and B are perfectly negatively correlated. Also suppose that it is possible to borrow at the risk-free rate. What must be the value of the risk-free rate?