FIN 550 Week 2 Homework · Chapter 4: Problems 4, 5, 6, and 7 · Chapter 6: Problems 1, 2, 3, and 4 · Chapter 4: Problems 4, 5, 6, and 7 · · 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 · · now selling for $45 a share. · · a. You put in a stop loss order at $40. Discuss your reasoning for this action. · · b. If the stock eventually declines in price to $30 a share, what would be your rate of return · · with and without the stop loss order? · · 6. Two years ago, you bought 300 shares of Kayleigh Milk Co. for $30 a share with a margin · · of 60 percent. Currently, the Kayleigh stock is selling for $45 a share. Assuming no dividends · · and ignoring commissions, compute (a) the annualized rate of return on this investment · · if you had paid cash, and (b) your rate of return with the margin purchase. · · 7. The stock of the Madison Travel Co. is selling for $28 a share. You put in a limit buy order · · at $24 for one month. During the month the stock price declines to $20, then jumps · · to $36. Ignoring commissions, what would have been your rate of return on this investment? · · What would be your rate of return if you had put in a market order? What if · · your limit order was at $18? · · · · Chapter 6: Problems 1, 2, 3, and 4 · · 1. Compute the abnormal rates of return for the following stocks during period t (ignore differential · · · · · · · · systematic risk): Stock Rit Rmt · · B 11.5% 4.0% · · F 10.0 8.5 · · T 14.0 9.6 · · C 12.0 15.3 · · E 15.9 12.4 · · Rit = return for stock i during period t · · Rmt = return for the aggregate market during period t · · 2. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following · · systematic risk measures (betas): · · Stock ?i · · B 0.95 · · F 1.25 · · T 1.45 · · C 0.70 · · E ?0.30 · · 3. Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the difference · · in each case. · · Chapter 6: Efficient Capital Markets 179 · · 4. Look up the daily trading volume for the following stocks during a recent five-day period: · · Merck · · Caterpillar · · Intel · · McDonalds · · General Electric · · Randomly select five stocks from the NYSE, and examine their daily trading volume for · · the same five days. · · a. What are the average volumes for the two samples? · · b. Would you expect this difference to have an impact on the efficiency of the markets for · · the two samples? Why or why not?
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