Question 1 (20 points): Johnson \& Johnson (JNJ) see link has been trading $120 to 180 range since March 2020 and currently priced at 166.JNJ is a large health care conglomerate. It has done well during this covid year - with serious stumbles in production of the vaccine but it appears to be recovering and should do well with demand for health care products. You believe that it is less vulnerable to the COVID / Omicron vaccine world and want to invest in the stock IF it makes sense. determine that JNJ will pay a dividend of 4.52 (quarterly dividends of 1.13 ). If you invest your funds risk-free in the money market, you will receive 2.5%. a. What is the expected return of JNJ stock? What is the risk premium of JNJ stock? b. Calculate the standard deviation of the return of JNJ stock (remember that you are using probabilities to do this, not historical data). Remember Sharpe ratio as you evaluate. You become convinced that this as good investment opportunity. In the current market JNJ seems like a safe investment (Sharpe ratio). You decide to buy JNJ stock on margin. You purchase 1000 shares, financing half with your own investment and borrowing half from your broker. c. How much do you borrow from your broker? What is your initial margin? Tomorrow bad news reaches the economy and the price of JNJ stock drops to 110 immediately. d. What is the new margin on the account? Do you receive a margin call? e. Calculate the return on your investment (equity investment). What would the return have been if you had not borrowed any funds (Hint: what is the return on JNJ stock)? f. Would sell or hold your investment following the collapse. Why? Question 1 (20 points): Johnson \& Johnson (JNJ) see link has been trading $120 to 180 range since March 2020 and currently priced at 166.JNJ is a large health care conglomerate. It has done well during this covid year - with serious stumbles in production of the vaccine but it appears to be recovering and should do well with demand for health care products. You believe that it is less vulnerable to the COVID / Omicron vaccine world and want to invest in the stock IF it makes sense. determine that JNJ will pay a dividend of 4.52 (quarterly dividends of 1.13 ). If you invest your funds risk-free in the money market, you will receive 2.5%. a. What is the expected return of JNJ stock? What is the risk premium of JNJ stock? b. Calculate the standard deviation of the return of JNJ stock (remember that you are using probabilities to do this, not historical data). Remember Sharpe ratio as you evaluate. You become convinced that this as good investment opportunity. In the current market JNJ seems like a safe investment (Sharpe ratio). You decide to buy JNJ stock on margin. You purchase 1000 shares, financing half with your own investment and borrowing half from your broker. c. How much do you borrow from your broker? What is your initial margin? Tomorrow bad news reaches the economy and the price of JNJ stock drops to 110 immediately. d. What is the new margin on the account? Do you receive a margin call? e. Calculate the return on your investment (equity investment). What would the return have been if you had not borrowed any funds (Hint: what is the return on JNJ stock)? f. Would sell or hold your investment following the collapse. Why
