Problem 2 (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.

At what price would you face a margin call? If the price is $86 at the end of the period, what is your margin at that point? What would be your profit if you repurchase the stock at $63/share?

Problem 3 (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.

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