Problem 2
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
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?