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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