1)

Which of the following transaction costs could impact the profitability of a trade?

a)

Broker fee

b)

Bid-ask spread

c)

Depth

d)

Price Impact

e)

A, B, and D

2)

You have the opportunity to invest in two different bonds: one is a municipal bond that pays 6.00%

and the other is a corporate bond that pays 8.25%. You are in the 30% marginal tax bracket.

Assuming everything else is equal

, in which bond should you invest? Which bond should you invest in

if your marginal tax bracket is 15%?

3)

You have decided to place a market order to buy 8,000 shares of stock ABC at and ask price of $30.00

per share. Your broker offers you a financing fee of 0% annual, your initial margin is 45% and your

maintenance margin is 30%.

a)

What is the minimum amount of equity required to place the order?

b)

Suppose that you hold the 8,000 shares over a year. If the share price one year from now can be

either $33.00 or $27.00, compute the return (over equity) one year from now (both scenarios).

c)

If the price is $27.00, do you have a margin call?

d)

Compute the share price that triggers a margin call.

e)

If the share price is $23.57, compute the additional amount of equity required to restore the

margin account to the maintenance margin.

How does your answer to

a), b), c), d)

and

e)

change if the broker offers you a financing fee of 5%?

Discuss.

FIN 3303

Homework #1

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4)

The current stock price of MSFT is $37.08. You expect the price of MSFT to drop below its current

level one year from now. Based on your information, you have decided to short sell 1,500 shares of

MSFT at an ask price of $37.08 per share. Your broker offers you a financing fee of 0% annual, your

initial margin is 45% and your maintenance margin is 30%.

a)

Compute the minimum amount of equity required to open the account and execute the

transaction.

b)

Moving against your expectations, one year from now, the price of MSFT increases to $42.00 per

share. Compute the margin at this price level. Is there a margin call?

c)

If the stock price is $42.00, compute the additional amount of equity required to restore the

margin account to its maintenance level of 30%.

d)

Right after the stock price reaches $42.00 and the margin account is restored to its maintenance

level, the share price increases to $50.00. Is there a new margin call? Compute the additional

amount of equity required to restore the margin account to its maintenance level if the stock price

is now $50.00.

(Note: Even though investors the price may drop in the medium or lung run, in the interim period,

the price may move against the investor's position. This forces investors to provide additional

liquidity to the margin account and this limits the investor's ability to arbitrage or correct

mispricings.)

5)

You are managing a $1,000,000 portfolio. Your boss would like to know how large your potential

losses could be over the next month. Specifically, she wants to know the Value at Risk (VaR). You

have monthly portfolio returns for the last 50 months, and you sort them in order from lowest to

highest. The five lowest returns are shown below:

-52.3%

-50.8%

-48.6%

-44.3%

-40.9%

a)

Assuming past returns are a reasonable estimate of potential future returns, what is the 2% VaR in

dollars?

b)

What are some of the potential risks of using historical (i.e., actual) returns to calculate VaR?

6)

You have $20,000 to invest and you have decided to buy Tesla (TSLA) on margin. Your broker

requires an initial margin of 60% and a maintenance margin of 40%. Currently, Tesla is trading for

$160 per share.

a)

Approximately how many shares can you buy in total?

b)

Assuming you bought as many shares as you could in part (a), how far can the price fall before your

broker issues a margin call?

7)

You would like to make an equity investment in Ford (F). Currently, the stock is trading at $13.49, the

bid is $13.47x100 and the ask is $13.50x150.

a)

If you want to buy 100 shares, what price would you expect to pay?

b)

If you want to sell 200 shares, would you expect the price to be higher, lower, or equal to $13.47?

Briefly explain.

c)

Should the ask price typically be above or below the bid price? Briefly explain why.

FIN 3303

Homework #1

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8)

You are managing a hedge fund and you have 10 analysts working for you. Each of the analysts is

developing a portfolio based on a specific industry (e.g., analyst #1 is covering automotive stocks, analyst

#2 is covering pharmaceutical stocks, etc.). You've decided to rebalance your hedge fund, and you are

comparing two possible portfolios that were developed by your analysts:

Portfolio A

Portfolio B

Mean Return

13.0%

12.0%

Beta

1.4

0.80

Standard Deviation

32.0%

30.00%

Tracking Error,

(e)

19.0%

13.5%

The risk-free rate is 3.0% and the market return is 9.50%

a)

What is the

Sharpe Ratio

of the two portfolios?

b)

What is the

Treynor Measure

of the two portfolios?

c)

Using your answers from (a) and (b), which portfolio is better diversified and why?

d)

What is the

Alpha

of the two portfolios?

e)

What is the

Information Ratio

of the two portfolios?

f)

If you could only choose one of the portfolios to add to the rest of your hedge fund portfolio

(which is well-diversified and actively managed), which one should you choose?

g)

If you were going to invest 100% of your money in one of the two portfolios, which one should

you choose?

9)

Using Yahoo finance, download daily prices for the SPDR S&P500 ETF (ticker = SPY) for February

2019. Use the "adjusted close" price to calculate daily returns and use the current actual risk-free rate

to answer the following questions.

[Hint: on the Yahoo Finance page, type in the ticker, then click on "Historical Prices" at the left and

enter the appropriate date range. Finally, when the prices appear, click the "Download to Spreadsheet"

link at the bottom of the screen]

YOU MUST ATTACH A PRINTOUT OF YOUR DATA TO THIS ASSIGNMENT AND SHOW

THE DAILY RETURNS

a)

What is the Sharpe ratio for the S&P500 for February 2019? Note: calculate the mean daily return

using the arithmetic mean (not the geometric mean).

b)

Your answer in (a) is a

daily

Sharpe ratio since you used daily data. Assume you calculated a monthly

Sharpe ratio and found it to be 0.20. Now assume there is no correlation between monthly returns,

what is the estimated annual Sharpe ratio?