Mr. and Mrs. Smith are analysts specializing in investments. The need to respond to the following problems.

a) An investor executes short-sell 500 shares. The share is now selling at JPY 3,000 per share. Calculate his/her maximum possible loss! What happens to the maximum loss if s/he simultaneously places a stop-buy order at JPY 3,300? Explain!

b) They document that the standard deviation of the market-index portfolio is 15%. A Nikkei 225 stock has a beta of 1.80 and a residual standard deviation of 35%. They are currently analyzing whether an increase of 0.40 in stock's beta or an increase of 4% in stock's residual standard deviation would make a larger increase in the stock's variance. Explain!

 
c) They realize that APT theory does not provide information on the factors that one might expect to determine risk premiums. How should researchers decide which factors to investigate? Explain with an example in the Japanese stock markets