# Fin 550 week 2 homework

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FIN 550 Week 2 Homework

· Chapter 4: Problems 4, 5, 6, and 7

· Chapter 6: Problems 1, 2, 3, and 4

·

·

· 4. You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly

·

· high of \$56. Your broker tells you that your margin requirement is 45 percent and that the

·

· commission on the purchase is \$155. While you are short the stock, Charlotte pays a \$2.50

·

· per share dividend. At the end of one year, you buy 100 shares of Charlotte at \$45 to close

·

· out your position and are charged a commission of \$145 and 8 percent interest on the

·

· money borrowed. What is your rate of return on the investment?

·

· 120 Part 1: The Investment Background

·

· Property of Cengage Learning

·

· 5. You own 200 shares of Shamrock Enterprises that you bought at \$25 a share. The stock is

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· now selling for \$45 a share.

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· a. You put in a stop loss order at \$40. Discuss your reasoning for this action.

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· b. If the stock eventually declines in price to \$30 a share, what would be your rate of return

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· with and without the stop loss order?

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· 6. Two years ago, you bought 300 shares of Kayleigh Milk Co. for \$30 a share with a margin

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· of 60 percent. Currently, the Kayleigh stock is selling for \$45 a share. Assuming no dividends

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· and ignoring commissions, compute (a) the annualized rate of return on this investment

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· if you had paid cash, and (b) your rate of return with the margin purchase.

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· 7. The stock of the Madison Travel Co. is selling for \$28 a share. You put in a limit buy order

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· at \$24 for one month. During the month the stock price declines to \$20, then jumps

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· to \$36. Ignoring commissions, what would have been your rate of return on this investment?

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· What would be your rate of return if you had put in a market order? What if

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· your limit order was at \$18?

·

·

·

· •

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· 1. Compute the abnormal rates of return for the following stocks during period t (ignore differential

·

·

·

·

·

·

·

· systematic risk):        Stock                Rit                 Rmt

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·   B                  11.5%            4.0%

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·   F                  10.0               8.5

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·   T                  14.0               9.6

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·   C                  12.0              15.3

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·   E                   15.9             12.4

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· Rit = return for stock i during period t

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· Rmt = return for the aggregate market during period t

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· 2. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following

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· systematic risk measures (betas):

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·   Stock                                    βi

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·   B                                       0.95

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·                        F                                       1.25

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·   T                                         1.45

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·   C                                         0.70

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·   E                                         −0.30

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· 3. Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the difference

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· in each case.

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· Chapter 6: Efficient Capital Markets 179

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· 4. Look up the daily trading volume for the following stocks during a recent five-day period:

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· • Merck

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· • Caterpillar

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· • Intel

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· • McDonald’s

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· • General Electric

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· Randomly select five stocks from the NYSE, and examine their daily trading volume for

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· the same five days.

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· a. What are the average volumes for the two samples?

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· b. Would you expect this difference to have an impact on the efficiency of the markets for

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· the two samples? Why or why not?

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