1. On Nov. 5, Faisal Purchased 5,000 shares of National Co., on margin for $120 per share.

On
Dec. 25, he Purchased 8000 shares of United Co., on margin for $95 per share. The initial
margin was 70% and the maintenance margin was 40%. On Feb. 20, the prices of National and
United stocks were $130, and $93 respectively. The interest rate on margin loan was 12%, and
the commission was $0.25 per share for each transaction.
a) Prepare the balance sheet as in Feb. 20
b) What is the type of the account on Feb. 20
c) Did Faisal receive a margin call on Feb. 20? Why?
d) Compute ROE on Feb. 20
2. On Jan. 20, Ali sold 500 shares of Star Co., on margin for $105 per share. The initial margin
was 60% and the maintenance margin was 40%. On July 20,, the prices of Star stock was $90.
The interest rate on margin loan was 12%, and the commission was $0.20 per share for each
transaction.
a) Prepare the balance sheet as in Jan. 20
b) Prepare the balance sheet as in July 20
c) What is the type of the account on July 20
d) Did Ali receive a margin call on July 20? Why?
e) Compute ROE on July 20
3. You were a consultant of a pension fund. The manager of this fund provides the following data
for two available portfolio:

Portfolio A
Expected rate of return

15%

Risk

5%

Portfolio B contains two stocks X and Y

Stock X

Stock Y

Expected rate of return

20%

25%

Risk

6%

8%

Investment

30%

70%

Correlation coefficient between X and Y

Which portfolio should the manager of the fund choose?

! 0.15

4. Security C has expected return of 12% and standard deviation of 20%. Security D has expected
return of 15% and standard deviation of 27%. If the two securities have a correlation
coefficient of 0.7, what is their covariance?
5. The following table provides the possible returns for two stocks:
Which stock you should purchase? Why?

Stock A

Stock B

Possible Return

Probability

Possible Return

Probability

- 2%

15%

2%

20%

10%

70%

12%

65%

22%

15%%

24%

15%

6. CISCO System's stock has a correlation with the market of 0.65. CISCO's standard deviation
of returns is 45% and standard deviation of the market is 20%. What is CISCO System's beta?
7. An investor provides the following data and asks you to help him to compute:

Expected Rate
of Return ( R )

Standard
Correlation Coefficient
Deviation ( )
( L,M)

Stock L

15%

4%

Market Portfolio (M)

12%

2%

Treasury Bill

5%

a) the market risk premium.

b) the risk premium for stock L.
c) The required rate of return for stock L.
d) Should the investor purchase stock L? Why?
2

0.6

8. a portfolio contains three stocks, the following table provides data about these stocks:

Correlation Coefficient
Stock

Investment Expected Rate of return Standard Deviation

30%

18%

4%

25%

24%

6%

45%

15%

3%

a) Compute the expected rate of return for this portfolio.

b) Compute the risk of this portfolio.

1.00

-0.45

0.20

1.00

-0.2
1.00