Q) The hedge fund now borrows a margin loan to long stock A. The long margin ratio requirment is 55% and margin loan interest rate is 3%. Please compute teh dollar return and rate of return again if the share price of firm B rises to $43 at time 2.

A HF has a capital of $10 million but need to retain cash of $1 million for unforeseen situations. Shares can be borrowed from the prime broker at an margin ratio of 18%. The HF has identified a list of underpriced shares A and a list of overpriced shares B, B BB 1.5 E(RB) 22% ERA 30% Assume CAPM: R 5%, E(RM) 20% ECR) under CAPM 5 1.5 (20 5) J 27.5% A's ex-ante alpha 2,5% B's ex-ante alpha 5.5% A HF has a capital of $10 million but need to retain cash of $1 million for unforeseen situations. Shares can be borrowed from the prime broker at an margin ratio of 18%. The HF has identified a list of underpriced shares A and a list of overpriced shares B, B BB 1.5 E(RB) 22% ERA 30% Assume CAPM: R 5%, E(RM) 20% ECR) under CAPM 5 1.5 (20 5) J 27.5% A's ex-ante alpha 2,5% B's ex-ante alpha 5.5%