Suppose you have $1 million to invest. Stock A has a current price of $8 and in
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Suppose you have $1 million to invest. Stock A has a current price of $8 and in one year it will pay a dividend of $1 and have a price of $9. A Treasury bill paying $1 a year from now is currently trading at a price of $0.90. Suppose that selling short each unit of A has round-trip transaction costs of 1%, while buying A stock or Treasury bills has no transaction costs.
If you decide to short sell $1.5 million of A shares and invest the entire amount (short sale proceeds plus your initial amount) in Treasury bills, what is your expected return over the next year?
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
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