FIN4350 (2022 SP)

Exam 1

Short Notes:

There are three numerical questions. Each question values 10 points. Please show the calculation steps. Showing no steps will be discounted significantly.   

Question 1 (10 points)

Suppose an investor is pessimistic about the Caterpillar (NYSE CAT) stock. She prepares to sell short 100 shares of common stocks. The current selling price of the stock is $150. The requirement for initial margin is 50% and the account requires a 40% maintenance margin. What will be the stock price that triggers a margin call?

Question 2 (10 points)

An investor is interested in selling a T-bill which is quoted with a 3.75% ask yield and a 3.95% bid yield. The bill has 80 days until maturity. What will be the price that the investor could sell for? (note that Treasury bill has a $10,000 face value and uses bank discount rate method)

Question 3 (10 points)

An investor is interested in constructing a portfolio that consists of both J&J stock and Treasury bond. She puts half of the wealth in J&J that has an expected return of 18% and a standard deviation of 26%. Then she puts the rest of her wealth in the Treasury bond that has an expected return of 5% and a standard deviation of 10%. Assuming the two securities have a correlation of .60. Please calculate the standard deviation of the portfolio.