Question 1

1. As an equity analyst from a firms research department, you have been given a RFR (Risk free rate) of 10 percent and a market return (RM) of 15 percent for the evaluation of following three stocks:

Stock	Beta	Current Price (RM)	Expected Price (RM)	Expected Dividend (RM)	Expected price E(Ri)
A	0.85	20	26	0.85
B	1.25	45	50	2.00
C	-0.20	35	42	1.35

Required:

1. Compute the expected return of each of the above three stocks.

2. Compute and plot your estimated returns on the graph from part (a)(i) above on the Security Market line (SML) and indicate what investment decisions you would take with regard to these stocks.

2. You have decided to sell short 100 shares of Charlotte Horse Farms when it is selling at its year high of RM56. Your broker informed you that your margin requirements is 45 percent and the commission on the purchase is RM155. While you are short the stock, Charlotte pays a RM2.5 dividend per share. At the end of year, you bought 100 shares of Charlotte at RM45 to close out your position and were charged a commission of RM145 and 8 percent interest on the money borrowed.

Calculate the rate or return on the investment.