Question
Suppose you have $1m to invest. Stock A has a current price of $8, and in one year will pay a dividend of $1 and
Suppose you have $1m to invest. Stock A has a current price of $8, and in one year will pay a dividend of $1 and have a price of $9. A treasury bill that pays $1 in one years time is currently trading at a price of $0.90. Assume that to short sell each unit of A has round-trip transaction costs of 1%, while purchasing either stock A or the treasury bill has no transaction costs. If you decide to short $1.5m of stock A and invest the entire amount (short sale proceeds plus your initial amount) in treasury bills, what is your expected return over the next year?
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