Capita Markets (Investment)

Question #1

You are constructing a portfolio of two stocks: Burton Inc. and Rome Inc. You would like to achieve a portfolio with the lowest possible risk (minimum variance portfolio). Burton Inc. has an expected return of 12% with a standard deviation of 11% and Rome Inc. has an expected return of 16% with standard deviation of 33%. The correlation between the two assets is 0.18. Determine the optimal mix of the two assets to achieve the minimum variance goal. Then calculate the expected return and standard deviation. (for accuracy complete your calculation to five decimal places and provide a solution to two decimal places)

Calculations:

Question #2

William is an experienced investor who decide to try a short selling strategy on his expectation that Peach Computers Ltd stock is overpriced and should fall in the coming month as result of strong competition from Blueberry Computers Ltd. Stock in Peach Computers is currently selling for $3.10 but William is convinced that it will fall below $1.50 in the month ahead.

• If William decides to sell short 10,000 shares of Peach Computers at its current price of $3.10. Calculate his initial margin deposit that he must deposit in his margin account. (use a 150% margin requirement).

• If the shares fall to $1.50 as William expects and he buys the shares back to close out his short position, calculate his holding period return on the investment. (calculate to 2 decimal places)

• Using a maintenance margin value of 25%, calculate the price that will trigger a margin call. (calculate to 2 decimal places)