QUESTION 1 a. A trader has purchased 200 shares of a stock at 100 per share...

Transcribed Image Text:

QUESTION 1 a. A trader has purchased 200 shares of a stock at 100 per share on margin. The terms of the loan obtained from the trader's broker are as follows. The initial margin is 50%, the interest rate on the loan is 8%, and the trader has agreed to maintain a margin of 20%. How low the price can drop in a year before the trader receives a margin call? [6 marks] b. State the assumptions and implications of the two-fund separation theorem C. [5 marks] Consider two stocks A and B. Both have an expected return of 10%, their standard deviations are 18% and 16% respectively, and their correlation is 0.35. Finally, the risk-free rate of return is 3%. Assuming all the assumptions of the one-fund theorem hold true, Required: . Identify the composition of the minimum variance portfolio, and calculate its expected return and standard deviation. ii. iii. [12 marks] Identify the composition of the tangency portfolio, and calculate its expected return and standard deviation. [4 marks] Calculate the volatility of the efficient portfolio that would be expected to generate 12.1% [6 marks] QUESTION 1 a. A trader has purchased 200 shares of a stock at 100 per share on margin. The terms of the loan obtained from the trader's broker are as follows. The initial margin is 50%, the interest rate on the loan is 8%, and the trader has agreed to maintain a margin of 20%. How low the price can drop in a year before the trader receives a margin call? [6 marks] b. State the assumptions and implications of the two-fund separation theorem C. [5 marks] Consider two stocks A and B. Both have an expected return of 10%, their standard deviations are 18% and 16% respectively, and their correlation is 0.35. Finally, the risk-free rate of return is 3%. Assuming all the assumptions of the one-fund theorem hold true, Required: . Identify the composition of the minimum variance portfolio, and calculate its expected return and standard deviation. ii. iii. [12 marks] Identify the composition of the tangency portfolio, and calculate its expected return and standard deviation. [4 marks] Calculate the volatility of the efficient portfolio that would be expected to generate 12.1% [6 marks]