1. HIJ is currently selling for $10 per share. The security is eligible for 50% margin. 1,000

shares are bought with an initial deposit of $8,000.

a. What is the initial value of the loan at the time HIJ is purchased?

b. If the price of the stock goes down to $6.00, what will be the margin percentage in the

account?

c. At what price will the investor receive a margin call? (when minimum margin is no longer met)

d. If the price falls to $8.50, what is the most the investor can withdraw from the account? If

they want to withdraw this amount, how many shares will they sell (whole number of

shares only)?

2. You are looking to invest your money in Stock ABC and Stock XYZ. Their historical returns

for the past 6 years are found in the following table.

ABC XYZ

2012 -12.56% -6.52%

2013 12.59% 21.45%

2014 -3.01% 23.85%

2015 -22.19% 53.65%

2016 9.35% -11.20%

2017 21.84% -9.76%

a) What is the sample standard deviation and average return (arithmetic mean) for each

stock? What is the correlation of returns (correlation coefficient)?

b) You are thinking of investing in a portfolio containing these 2 stocks. Calculate the

return and standard deviation of returns if you held these portfolios for the past 6 years

with the following weightings.

Portfolio 1 ABC 90%

XYZ 10%

Portfolio 2 ABC 40%

XYZ 60%

c) Which Portfolio would you prefer and why?

3. Suppose you are looking at three companies with the following predicted dividend patterns:

Trader Moe's Buyer Sam's Seller Bob's

Year 1 2.00 2.00 2.00

Year 2 2.00 2.18 2.25

Year 3 2.00 2.38 2.50

You expect that Trader Moe's and Buyer Sam's will continue with the same dividend pattern

moving forward. For Seller Bob's you expect it to increase its dividend by a constant 8%

starting in year 4.

The current stock price for each stock is as follows:

Trader Moe's - $15.00

Buyer Sam's - $38.00

Seller Bob's - $28.00

If you require 15% return on your investments, which stock would you prefer to buy and

why? (Hint: use the dividend discount model and compare this value to the share prices

above).