Part II: Free Response Questions 1 Assume you sell short 100 shares of common stock at $45 per share, with an initial margin of 50% and a maintenance margin of 35%. (ignore interest on margin) a. What is your initial investment? (3 points) b. If the stock price increases to $50 per share, what is your holding period rate of return if there is no dividend paid during the period? (3 points) c. At what price will you receive a margin call? (4 points) Investors attribute all securities' systematic risks to two factors, F1 and F2. Suppose portfolios A, B, and C are well-diversified. The risk free rate of return is 7%. INote: E(R) represent risk premium) Portfolio 1 Portfolio B 0 B Portfolio C 0.5 1.25 E(R) 1% 7% a. If no arbitrage exist, what should be the expected return on portfolio C? (4 points) b. There is another portfolio D. Portfolio D's has a , equals to 1.5 and a B2 equals to 0.5, and its expected rate of return is 10%. Is there an arbitrage opportunity? If so, construct a zero-investment trading strategy to earn profits without any risk. (6 points)