Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Problem 5 Leverage and target return 2 points A pension fund targets a 8.5 percent annual return on equity on its long position in a
Problem 5 Leverage and target return 2 points A pension fund targets a 8.5 percent annual return on equity on its long position in a stock paying a 2.5 percent dividend. The fund plans to hold the position for one year, and expects the stock to appreciate by 4 percent during that time. The fund can borrow at a rate of 1.5 percent to finance the position in a 1-year margin loan secured by the stock. If the stock appreciates as estimated, how many turns of leverage must the fund initially take on to achieve its target return? (Leverage is de fined as the ratio of the stock position's value to the initial margin, the portion of the position's initial value that the fund doesn't finance through borrowing.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started