Question

1. You sell short 400 shares of Apple that are currently selling at $200 per share. You post the 60% margin required on the short sale, and the maintenance margin requirement is 25%. At what price would you receive a margin call (assume the margin call happens immediately).

		$240
		$248
		$256
		$260
		None of the above

1. You short-sell 10 shares of Amazon.com, Inc today. The stock price is $2,000 per share. What is your maximum possible gain of this trade when you cover your position in the future (ignoring transactions costs)?

		$2,000
		$10,000
		$20,000
		$100,000
		Unlimited

1. Investor X puts up $10,000 but borrows an equal amount of money from her broker to double the amount invested to $20,000. The broker charges 8% interest on the loan. The stock was originally purchased at $10 per share and in one year, Investor X sells the stock for $12. Investor Y does not believe in borrowing to buy shares and invests $20,000 of his own money in the same stock. What is the difference in rate of return between Investor X and Investor Y?

		0%
		2%
		6%
		12%
		None of the above

1. The table presents forecasts of the returns of stock market and probability of each state of the economy for next year. Calculate the standard deviation.
   

State of Economy		Return	Prob. of State
Recession		-12%	0.15
Normal		6%	0.60
Expansion		20%	0.25
			6.9%
			8.9%
			9.8%
			14.4%
			None of the above

Answer 1

		A	B	C	D=A*25%
		Share Price	Gain/(Loss)	Margine Balance	Maintenance Margin
		$200	$0	$120	$50
		$240	($40)	$80	$60
		$248	($48)	$72	$62
		$256	($56)	$64	$64
		$260	($60)	$60	$65
	Margin Call will be made when Margin Balance
	is less than Maintenance Margin Requirement
	ANSWER:$256
	If you Short sell , at $2000,
	Assume S= Price at settlement
	Gain /(Loss)=10*(2000-S)
	Maximum Possible Gain when S=0
	Maximum Possible Gain =10*$2,000=$20,000
	ANSWER:$20,000
	RETURN OF INVESTOR X
	Investment =$10,000
	Purchased 2000 shares at $10 per share
	Borrowed $10,000
	Amount to be returned to lender =10000*1.08	$10,800
	Selling price =2000*$12=	$24,000
	Amount received in hand after paying to lender	$13,200
	Annual Return =(13200/10000)-1=	32%
	RETURN OF INVESTOR Y:
	Investment=$20000
	Selling price =$24000
	Annual Return =(24000/20000)-1=	20%
	Difference in rate of return =32-20=	12%
	ANSWER: 12%
	Mean Return =Sum (Return*Probability)
	Deviation from Mean =(Return-Mean Return)
	Variance of Return =SUM ((Deviation^2)*Probability)
	Standard Deviation =Square Root of Variance
		R	p	A=R*p	D=R-4.8	E=D^2	F=E*p
	State of Economy	Return(Percentage)	Probability of State	Return*Probability(%)	Deviation from Mean(%)	Deviation Squared	Deviation squared*Probability
	Recession	-12	0.15	-1.8	-16.8	282.24	42.336
	Normal	6	0.6	3.6	1.2	1.44	0.864
	Expansion	20	0.15	3	15.2	231.04	34.656
			SUM	4.8		SUM	77.856
	Variance of Return	77.856	%%
	Standard Deviation of Return	8.9	%	(SQRT(77.856)
	ANSWER: 8.9%