Suppose Jane has $12000 available to invest at the end of 5/2010, which she places into her brokerage account. Her broker requires an effective interest of 1% per month on any funds borrowed from her. And any funds placed with her broker earn an effective monthly rate of 1% also. The price of KLV stock is $50 at the end of 5/2010 and $57.50 at the end of 6/2010. KLV did not pay a dividend to its stockholders during 6/2010. Ignore commissions and other trading costs. 

 

A. What is the return on KLV stock in 6/2010? B. Suppose that, at the end of 5/2010, Jane decides to borrow $3000 from her broker and use this borrowed money plus the $12000 in her brokerage account to buy KLV stock on margin. 

1. What is the value of her brokerage account at the start of 6/2010? 

2. What fraction of her portfolio is invested in KLV stock at the start of 6/2010? 

3. What fraction of her portfolio is invested in the riskless asset at the start of 6/2010?

4. What is the percent margin associated with Jane's KLV position at the start of 6/2010? 

5. What is the return on her portfolio in 6/2010? 

6. What is the value of her brokerage account at the end of 6/2010? 

C. Suppose instead that, at the end of 5/2010, Jane decides to short sell $9000 worth of KLV stock, keeping the proceeds from the short sale in her brokerage account. 1. What is the value of her brokerage account at the start of 6/2010? 

2. What fraction of her portfolio is invested in KLV stock at the start of 6/2010? 

3. What fraction of her portfolio is invested in the riskless asset at the start of 6/2010? 

4. What is the percent margin associated with Jane's KLV position at the start of 6/2010? 

5. What is the return on her portfolio in 6/2010? 6. What is the value of her brokerage account at the end of 6/2010?

Answer rating: 100% (QA)

A The return on KLV stock in 62010 can be calculated as follows Return Ending Price Beginning Price Beginning Price Return 5750 50 50 Return 750 50 Return 015 or 15 Therefore the return on KLV stock i... View the full answer