**FIN 550 Week 2 Homework**

· Chapter 4: Problems 4, 5, 6, and 7

· Chapter 6: Problems 1, 2, 3, and 4

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

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

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

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

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

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

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· 120 Part 1: The Investment Background

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· Property of Cengage Learning

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· 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

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· 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?