Problem 2 You sell short 100 shares of Microsoft at $300 a share The initial margin is 50% The cost of borrowing money in the margin account in 5% Ignore cost of borrowing shares The stock pays a dividend of $3 a share per year The minimum maintenance requirement is 20% 5) In 2 years, the stock drops to $230 a share what is the annual percentage return on your investment? Make sure you clearly indicate if it is positive or negative! 6) What is the equity in your account after 2 years? 7) Calculate the price at which you will receive a margin call base your calculation on the information that is present when you make the purchase hence at time t=0 8) What type of index is the S&P 500 and what are the 5 largest companies in that index? 9) True or False If you expect smaller companies to outperform larger companies you should favor an equal weighted index over a value weighted index 10) True or False If you want to make a bearish investment using options or you wish to protect from downside risk you should purchase call options. Helpful Formula: Effective Annualized Return for multi-year return = EAR = (1 + Total Holding Period Return)^(1/N) -1; where N is the number of years.