# 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:

• Merck
• Caterpillar
• Intel
• McDonald’s
• General Electric

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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