Typically, people buy shares of stock in the expectation that the stock's price will increase, but it is also possible to make money by correctly anticipating that a stock's price will decline -- "selling short." Assume that you think that Volkswagen (VW) stock is going to decline in price over the next few months because of continuing uncertainty about why the company cheated on its emissions testing. A share of VW stock is currently selling for $50. You arrange to borrow 100 shares of VW stock for three months for a price of $1 per share. Three months later, sure enough, VW stock is selling for only $40 per share. You then purchase 100 shares at $40 each and return the 100 shares of VW stock that you borrowed. How much money did you make or lose? Earned $900 O Lost $1,100 O Lost $1,000 Earned $1,100 Earned $1,000.

Typically, people buy shares of stock in the expectation that the stock's price will increase, but it is also possible to make money by correctly anticipating that a stock's price will decline -- "selling short." Assume that you think that Volkswagen (VW) stock is going to decline in price over the next few months because of continuing uncertainty about why the company cheated on its emissions testing. A share of VW stock is currently selling for $50. You arrange to borrow 100 shares of VW stock for three months for a price of $1 per share. Three months later, sure enough, VW stock is selling for only $40 per share. You then purchase 100 shares at $40 each and return the 100 shares of VW stock that you borrowed. How much money did you make or lose? Earned $900 O Lost $1,100 O Lost $1,000 Earned $1,100 Earned $1,000.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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On November 1, an analyst who has been studying a ﬁrm called Computer Sciences believes that the company will make a major announcement before the end of the year. Computer Sciences currently is priced at 27.63 and has a beta of 0.95. The analyst believes that the stock can advance about 10 percent if the market does not move. The analyst mm the market might decline by as much as 5 percent, leaving the stock with a return of 0.10 + (-0.05 x 0.95) = 0.0525. To capture the full 10 percent alpha, the analyst recommends the sale of a particular stock index futures. The March contract currently is priced at 393. Assume that the investor owns 100,000 shares of the stock. Set up a transaction by determining the appropriate number of futures contracts. Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract 18' at 432.30, and the multiplier, is 500. Explain your results.
Currently, inventors in the stock market expect the price of the XYZ corporation's stock next year to be $115. They also expect the corporation to pay $5 of dividend next year. Currently the price of stock is $100. The investors hear some good news about the corporation. As a result, they now expect the price of the stock next year to be $130 and for the corporation to pay a dividend of $8. According to the efficient markets hypothesis, the price of the stock today will jump to dollars.
A rational investor is choosing to invest in either Fakebook stock, which is a tech company, or Abala Land, a real estate company. Both are hypothetical Philippine stocks. Their expected returns are 19% and 15%, and standard deviations of 39% and 30%, respectively. What will he most likely do? Invest in Fakebook stock because it earns more than Abala Land stock. Invest in Abala stock because it has a higher Sharpe ratio of 0.50 compared to Fakebook’s 0.49. Do not invest in Fakebook stock because it has a higher coefficient of variation of 2.05 than Abala Land’s 2.0. Invest in Abala stock, because it is less risky than Fakebook stock.
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A big pharmaceutical company, DRIg, has just announced a potential cure for cancer. The stock price increased from $5 to $138 in one day. A friend calls to tell you that he owns DRIg. You proudly reply that you do, too. Since you have been friends for some time, you know that he holds the market, as do you, and so you both are invested in this stock. Both of you care only about expected return and volatility. The risk-free rate is 3%, quoted as an APR based on a 365-day year. DRIg made up 0.82% of the market portfolio before the news announcement. a. On the announcement your overall wealth went up by 1.4% (assume all other price changes cancelled out so that without DRIg, the market return would have been zero). How is your wealth invested? b. Your friend's wealth went up by 2.5%. How is his wealth invested?
After learning how to value a stock in his Corporate Finance class, Mark Stark decided to put his knowledge into practice and use the constant growth rate model to value El Tomate Feliz Co. He found that the company was severely undervalued. The stock was trading at $50 per share, but he valued it at $120 per share. Mark complained: “I thought that El Tomate Feliz was a steal and bought as many shares as I could, but the price didn’t go up. I have waited a year, and the price has not changed that much.” Lower necessary rate of return - Mark would have estimated his cost of equity or required rate of return at lower levels, resulting in better intrinsic values as a result of the lower discount rate. What does this mean,” …Mark would have estimated his cost of equity or required rate of return at lower levels"
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Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure
After reading the following short article, answer the subsequent question with one or twosentences:Question: Why were stock options introduced? Article: Solving The Principal Agent Problem: Apple Insists That Executives Must Hold Company Stock Over the years there have been a number of attempts at solving the principal/agent problem. Apple's the latest to try and do so and it has to be said that their attempt is likely to avoid most of the problems of earlier ones. The basic problem is that we often hire people to do things for us, on our behalf. We are the principals and those we've hired are our agents. Obviously we do this because other people have skills that we do not and we want those skills: it's the division and specialisation of labour all over again. However, we run into a problem because the incentives to the agent aren't necessarily going to lead to the behaviour which best benefits the principal. A lawyer being paid by the hour has an incentive to do things slowly…
Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the company will pay dividends of $2 per year on that share every year. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return by owning the stocks of other very similar fashion companies. If investors care only about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)

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