Question

1. On Jan 1, you sold short 400 shares of AT&T at $35 per share. You post $7000 to the margin account. On April 1, you received a margin call on this trade. Assume the minimum margin requirement is 40%, what is the price of the stock that triggered the margin call?

		$29.17
		$37.5
		$39.25
		$43.75
		None of the above

1. You are an investment advisor for Alan and Jimmy. You've helped them optimally allocate their investment portfolios along the same capital allocation line (CAL). If Alan's portfolio has a higher weight on risk-free asset than Jimmy's portfolio, then which of the following statements MUST be true:
   
   [I]   Alan’s portfolio has lower expected returns than Jimmy’s
   [II]  Alan is less risk-averse than Jimmy
   [III] Alan must hold a positive position in the risky asset

		I only
		I and II
		I and III
		II and III
		I, II, and III

1. On January 1, you sold short 200 shares of Walt Disney Co at $150 per share and pledged 50% initial margin. On March 1, a dividend of $10 per share was paid. On June 1, you closed your position buying 200 shares at $170 per share. What is your rate of return?

		-30%.
		-35%.
		-40%.
		-70%
		None of the above

Answer 1

1)	Particulars	Amount
	Margin amount	7000
	Margin requirement	40%
	Total amount can be traded	17500
	No of Shares	400
	Average price at which margin call required	43.75
2)	Alan has a higher allocation in the risk free assets than Jimmy portfolio
	Lets create a hypothetical portfolio to understand it better
	Particulars	Return	Alan	Jimmy	Alan Return	Jimmy Return
	Risk Free Assets	6%	70%	40%	4.20%	2.40%
	Risky assets	10%	30%	60%	3.00%	6.00%
					7.20%	8.40%
	Answer 1 is correct
	Answer 2 is wrong because if alan has low risk averse then he must invest his money in risky assets more compare to risk free assets
	Answer 3 Alan must hold a positive position because he can't borrow at a higher rate and invest in risk free assets. In that case he will be in a loss position even initially
	So final answer is I & III are correct