Please answer the following questions 1 through 3. 1. Investors require a risk p
ID: 2793467 • Letter: P
Question
Please answer the following questions 1 through 3.
1. Investors require a risk premium as compensation for bearing ______________.
A. unsystematic risk
B. residual risk
C. alpha risk
D. systematic risk
2. You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)
A. $35.71
B. $26.55
C. $30.77
D. $28.95
3. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.
A. 23%
B. 19.76%
C. 18.45%
D. 17.67%
Explanation / Answer
D. systematic risk
2. amount lent by broker per share = 0.5*50 = 25
for margin call; 70% should equal 25
30% = 25*30/70 = 10.7143
price should be = 50 - (25 - 10.7143)= 35.71
3.
variance = (0.4*0.35)^2 + (0.6*0.15)^2 + 2*0.4*0.6*0.35*0.15*.45 = 0.0390
std dev = square root of variance = 19.76%