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FIN 550

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?

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):

2. Compute the abnormal rates of return for the
five stocks in Problem 1 assuming the following systematic risk
measures (betas):

Stock

βi

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.

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

MerckCaterpillarIntelMcDonald’sGeneral Electric

http://www.nasdaq.com/symbol/ge/historical

Randomly select five
stocks from the NYSE, and examine their daily trading volume for the same five
days. http://www.marketwatch.com/investing/Stock/WFC

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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