QUESTION 4. A. An investor invests K10000 in stocks trading at K100. If the price for these shares goes up by 30% and ignoring dividends, what would be the investor's expected rate of return? Assuming the investor borrows another K10000 from a broker and invests in the same stocks to buy more of the same shares and the margin loan interest is 9% per year, what will his rate of return be now if the stocks goes up by 30%, ignoring dividends, again ? Suppose the investor only borrows K5000 at the same interest rate of 9% per year, what will the rate of return be if the share price goes up by 30%? If it goes down by 30%, and if it remains unchanged? B. An investor is bearish on a stock whose market price is K100 per share. He instructs his broker to sell short 1000 shares who borrows the 1000 either from another customer's account or from another broker. Suppose the broker has a 50% margin requirement on short sales, how would the investor's account look like? Supposing the share price drops to K70, how would the account look like? Supposing the broker has a maintenance margin of 30% on short sales, how much can the share stock rise before you get a margin call? Construct a balance sheet if the share price goes up to K110. If the short position maintenance margin is 40%, how far can the stock price rise before the investor gets a margin call? C. A growth and income mutual fund has year end balances as follows: Assets K5092.20 million Liabilities K4.6 million Shares 150.6 million What is the net asset value of the portfolio? QUESTION 4. A. An investor invests K10000 in stocks trading at K100. If the price for these shares goes up by 30% and ignoring dividends, what would be the investor's expected rate of return? Assuming the investor borrows another K10000 from a broker and invests in the same stocks to buy more of the same shares and the margin loan interest is 9% per year, what will his rate of return be now if the stocks goes up by 30%, ignoring dividends, again ? Suppose the investor only borrows K5000 at the same interest rate of 9% per year, what will the rate of return be if the share price goes up by 30%? If it goes down by 30%, and if it remains unchanged? B. An investor is bearish on a stock whose market price is K100 per share. He instructs his broker to sell short 1000 shares who borrows the 1000 either from another customer's account or from another broker. Suppose the broker has a 50% margin requirement on short sales, how would the investor's account look like? Supposing the share price drops to K70, how would the account look like? Supposing the broker has a maintenance margin of 30% on short sales, how much can the share stock rise before you get a margin call? Construct a balance sheet if the share price goes up to K110. If the short position maintenance margin is 40%, how far can the stock price rise before the investor gets a margin call? C. A growth and income mutual fund has year end balances as follows: Assets K5092.20 million Liabilities K4.6 million Shares 150.6 million What is the net asset value of the portfolio
