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ADM3352 (11)
Chen Guo (1)
Lecture

Solutions to Assignments on 7th edition.doc

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Department
Administration
Course
ADM3352
Professor
Chen Guo
Semester
Fall

Description
th Assignment Solutions (7 edition) CHAPTER 2 FINANCIAL MARKETS AND INSTRUMENTS 10. a. The index at t = 0 is (60 + 80 + 20)/3 = 53.33. At t = 1, it is (70+70+25)/3 = 55, for a rate of return of 3.13%. b. Stock Q P0 Market Value P1 Market Value A 200 60 12,000 70 14,000 B 500 80 40,000 70 35,000 C 600 20 12,000 25 15,000 The index at t=0 is (12,000+40,000+12,000)/100=640. At t=1, it is also 640, so the rate of return is zero. c. Before splits After splits Stock P0 Q P0 Q P1 A 60 200 30 400 35 B 80 500 20 2,000 17.5 C 20 600 20 600 25 After the splits the index has to remain unchanged so the divisor (which initially was 3) has to be reset. The sum of the three prices after the split is 70, while the index value before splits was 53.33. therefore 70/d=53.33 and the new divisor must be 1.3125. The index at t=1 is (35+17.5+25)/1.3125 = 59.05 for a return of 10.71%. d. The total market value of A and B as well as that of the market remain unchanged after the two splits so that the return on the value-weighted index is not affected by the splits (and it is zero). 11. a. The index at t = 0 is (90 + 50 + 100)/3 = 80. At t = 1, it is 250/3 = 83.333, for a rate of return of 4.17%. b. In the absence of a split, stock C would sell for 110, and the index would be 250/3 = 83.333. After the split, stock C sells at 55. Therefore, we need to set the divisor d such that 83.333 = (95 + 45 + 55)/d, meaning that d = 2.34. c. The return is zero. The index remains unchanged, as it should, since the return on each stock separately equals zero. 12. a. Total market value at t = 0 is (9,000 + 10,000 + 20,000) = 39,000. Market value at t = 1 is (9,500 + 9,000 + 22,000) = 40,500. Rate of return = 40,500/39,000 1 = 3.85%. b. The return on each stock is as follows: rA= 95/90 1 = .0556 rB= 45/50 1 = .10 r =110/100 1 = .10 C The equally-weighted average is .0185 = 1.85% c. The geometric average return is [(1.0556)(.90)(1.10)] 1 = .0148 = 1.48%. CHAPTER 3 TRADING ON SECURITIES MARKETS 7. The broker is to attempt to sell Barrik as soon as a sale takes place at a price of $38 or less. Here, the broker will attempt to execute if a sale takes place at the bid price, but may not be able to sell at $38, since the bid price is now $37.80. 8. The broker is instructed to attempt to sell your Kinross stock as soon as the Kinross stock trades at a bid price of $38 or less. Here, the broker will attempt to execute, but may not be able to sell at $38, since the bid price is now $37.85. The price at which you sell may be more or less than $38 because the stop-loss becomes a market order to sell at current market prices. If the bid has sufficient quantity you are likely to get $37.85, however. 9. a. The buy order will be filled at the best limit-sell order, $50.25. b. At the next-best price, $51.50. c. You should increase your position. There is considerable buy pressure at prices just below $50, meaning that downside risk is limited. In contrast, sell pressure is sparse, meaning that a moderate buy order could result in a substantial price increase. 12. Cost of purchase is $80 x 250 = $20,000. You borrow $5,000 from your broker, and invest $15,000 of your own funds. Your margin account starts out with a net worth of $15,000. a. (i) Net worth rises by $2,000 from $15,000 to $88 x 250 $5,000 = $17,000. Percentage gain = $2,000/$15,000 = .1333 = 13.33% (ii) With unchanged price, net worth remains unchanged. Percentage gain = zero (iii) Net worth falls to $72 x 250 $5,000 = $13,000. Percentage gain = = .1333 = 13.33% The relationship between the percentage change in the price of the stock and the investors percentage gain is given by: % gain = % change in price x = % change in price x 1.333 For example, when the stock price rises from 80 to 88, the percentage change in price is 10%, while the percentage gain for the investor is 1.333 times as large, 13.33%: % gain = 10% x = 13.33%
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