Hult International Business School – Individual Questions & Case

Analysis Assignment (“Beta Management Co.” Case)

Course: MFIN - Investments (London)

Lecturer: Alek Grzeszczak
Date: Spring 2023

This individual case analysis is to be submitted via myCourses. Total points: 50.

This Section 1 (6 points) of your Individual Assignment covers Buying and

Selling on Margin and corresponds to chapter 3 in the textbook. Answer all 3
questions, add space as required.

Question 1 (2 points)

Suppose that you just purchased 100 shares of Pear stock for $40 per share. The initial margin
requirement is 60%, which means the amount borrowed is $1,600. The corresponding balance sheet is
below: (Show your answer to 2 decimal places.)

Assets Liabilities and Equity

Stock $ 4000 Loan from broker $ 1600

Equity $ 2400

Total assets $ 4000 Total liabilities and equity $ 4000

a. Now suppose the price of the stock falls to $33 per share. What is your current margin percentage?

100 x 33 = 3300 —value of stock

Equity in the account falls to $1700
New Margin= $1700/ $3300 = 51.52%

b. Construct the balance sheet to show the current situation.

Assets Liabilities and Equity

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 Stock $ 3300 Loan from broker $ 1600

Equity $ 1700

Total assets $ 3300 Total liabilities and equity $ 3300

c. If the maintenance margin is 40%, at what stock price would you get a margin call?

Let P be the price of the stock. Value of investors 100 shares is 100P, equity in account is 100P- $1600.
Percentage margin is (100P- $1600)/100P. Solving for P, the maintenance margin is:

100P- $1600 = 40%

100P

This implies that P= $26.67. If the stock price were to fall below $26.67 per share, the investor would
get a margin call.

Question 2 (2 points)

Suppose that you just short sold 100 shares of Loud Mouth stock for $73 per share.

a. If the initial margin requirement is 55%, how much equity must you invest? (Show your answer to the
nearest dollar)

Value of stock= 100 x $73 = $7,300

Initial Margin requirement= 55% x $7,300= $4,015

This means that you need to invest at least $4,015 in equity to cover the initial margin requirement for
the short sale.

b. Construct the balance sheet that corresponds to the transaction.

Assets Liabilities and Equity

Cash $ 7,300 Short position (100 shares) $ 7,300

T-bills $ 4,015 Equity $ 4,015

Total assets $ 11,315 Total liabilities and equity $ 11,315

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c. Now suppose the price of the stock falls to $65 per share. What is your current margin percentage?
(Show your answer to 2 decimal places.)

If price falls to $65 per share, 100 shares are bought at $65, purchase cost is $6,500.

= (Initial Investment + (Initial stock price x number of shares sold short) – Dividends paid – (no of
shares sold short x Ending stock price ))/ number of shares sold short x Ending stock price

= 4015 + (73 x 100) -0 –(100 x 65)

100 x 65

= 74.08%

d. The maintenance margin is 30%. At what stock price would you get a margin call? (Show your
answer to 2 decimal places.)

Let P be the stock price of stock. Value of shares to be paid back is 100P, equity in account is ($11,315
- 100P)/100P. Value of P is this:

$11,315 - 100P = 30%

100P

This implies that P = $87.04. If the stock rises above $87.04 per share, investor would get a margin call

Question 3 (2 points)

You paid cash for $1,000 worth of stock a year ago. Today the portfolio is worth $1,150. (Indicate
negative values with a minus sign. Show your answer to 2 decimal places.)

a. What rate of return did you earn on the investment?

If $1,000 worth of stock a year ago, today is worth $1,150, there is a capital gain of $150.

Return on investment = $150

$1,000

= 15.00%

b. Now suppose that you bought the same stock but bought it on margin. The initial margin requirement
was 60%. Recalculate your rate of return, ignoring any interest due.

This means $400 is invested in cash and the remaining $600 is borrowed from a broker.

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Thus:
Capital Gain = Ending Value - Beginning Value = $1,150 - $1,000 = $150
=Capital gain on the stock + Dividends – Interest on margin
Initial investment

=. 150 + 0 – 0
600

= 25.00%

c. Recalculate the rates of return for a cash purchase in the event that the stock is worth $850 today.

If the stock is worth $850 today, and you paid $1,000 for it initially, then you have a capital loss of $150.

Capital Gain = Ending Value - Beginning Value = $850 - $1,000 = -$150

Rate of Return = ($850 - $1,000)

$1,000
=-$150
$1,000

= -15.00%

d. Recalculate the rates of return for a margin purchase in the event that the stock is worth $850 today.

Capital Gain = Ending Value - Beginning Value = $850 - $1,000 = -$150

Investment = Beginning Value - Initial Margin = $1,000 - ($1,000 x 60%) = $1,000 - $600 = $400

Rate of Return = ($850 - $1,000)

$600
= -$150
$600

= -25.00%

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This Section 2 (17 points) of your Individual Assignment covers Returns and
corresponds to chapter 5 in the textbook. Answer all 7 questions, add space as
required.

Question 1 (1 point)
You purchased a bond 72 days ago for $891.26. You received an interest payment of $20 56 days ago.
Today the bond’s price is $884.89.

What is the holding period return (HPR) on the bond as of today? (Show your answer to 2 decimal
places.)

HPR = Ending price-Beginning price+Interest received

Beginning price

= 884.89-891.26+20
891.26
=1.53%

Question 2 (3 points)

You are the manager of the Mighty Fine mutual fund. The following table reflects the activity of the fund
during the last quarter. The fund started the quarter on January 1 with a balance of $100 million. (Show
your answers to 2 decimal places.)

Mighty Fine Mutual Fund

Monthly Data (measured at end of month)

January February March

Net inflows ($ million) 4.9 -5.8 0

HPR (%) -2.7 5.9 3.8

a. Calculate the quarterly arithmetic average return on the fund.

The arithmetic average equals the sum of the months’ returns divided by the number of months

= -2.7%+5.9%+3.8% = 2.33%
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b. Calculate the quarterly geometric (time-weighted) average return on the fund.
=([(1-2.7%) x (1+5.9%) x (1+1.80%)]^⅓)-1
= ((0.973 x 1.059 x 1.018)^⅓) -1
=2.27

c. Calculate the quarterly dollar-weighted average return on the fund.

Month Inflows Return Portfolio value

Beginning Balance

January 4.9 2.70% 5.0323

February -5.8 5.90% -0.8129943

March 0 3.80% 0.843888083

Balance at end 0.843888083

IRR 1.90%

Question 3 (3 points)

You invested in a 3-month certificate of deposit at your bank. Your investment was $1,500, and at the
end of the term you will receive $1,530. (Show your answers to 2 decimal places.)

a. What is the holding period return (HPR) on your investment?

HPR = (Ending Value - Beginning Value) / Beginning Value x 100%

Beginning Value = $1,500

Ending Value = $1,530

HPR = ($1,530 - $1,500) x 100

$1,500
= $30 x 100%
$1,500
= 2.00%

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b. What is the annual percentage rate (APR)?

The APR is the three months rate times the number of three months period in one year
APR= 2% x (12/3)= 8.00%

c. What is the effective annual rate (EAR)?

1+ EAR = (1+APR/n)^n =(1+0.08/4)^4

=(1+0.08/4)^4 -1
EAR= 8.24%

Question 4 (3 points)

The following data represent the probability distribution of the holding period returns for an investment
in a particular stock. (Show your answers to 2 decimal places.)

State of the Probability,

Scenario #(s) HPR
Economy p(s)
Boom 1 0.36 29.2%
Normal growth 2 0.45 8.40%
Recession 3 0.19 -18.30%

a. What is the expected return on the stock?

= (0.36 x 29.2%) + (0.45 x 8.4%) + (0.19 x -18.30%)

= 10.82%

b. What is the variance of the returns on the stock?

State of the Probability,

Economy Scenario #(s) p(s) HPR Mean Var
Boom 1 0.36 29.20% 0.10512 0.012168296
Normal
growth 2 0.45 8.40% 0.0378 0.000262450
Recession 3 0.19 -18.30% -0.03477 0.016105981
10.82% 2.85%

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c. What is the standard deviation of the returns on the stock?

This is given as the square root of variance

=16.89

Question 5 (3 points)

The common stock of Perforated Pool Liners, Inc. now sells for $50.00 per share. The table below
shows the anticipated stock price and the dividend to be paid one year from now. Both the price and the
dividend will depend on the level of growth experienced by the firm. (Show your answers to 2 decimal
places.)

Probability, End-of-Year Annual

State
p(s) Price Dividend

Super high growth 0.1 $62.00 $3.00

High growth 0.2 $58.00 $3.00

Normal growth 0.4 $56.00 $2.00

Low growth 0.2 $50.00 $2.00

No growth 0.1 $46.00 $0.00

a. Calculate the holding period return (HPR) for each of the possible states, assuming a one-year
holding period. (Use a negative sign to indicate a negative answer.)

Probability, Price at End-of-Year Annual Holding Period

State p(s) beginning Price Dividend Return
Super high
growth 0.1 50 62 3.00 30.00%
High growth 0.2 50 58 3.00 22.00%
Normal
growth 0.4 50 56 2.00 16.00%
Low growth 0.2 50 50 2.00 4.00%
No growth 0.1 50 46 0.00 -8.00%

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b. What is the expected return for a holder of Perforated Pool Liners stock?

Probability, Price at End-of-Year Annual Expected

State p(s) beginning Price Dividend return
Super high
growth 0.1 50 62 3.00 0.03
High growth 0.2 50 58 3.00 0.044
Normal
growth 0.4 50 56 2.00 0.064
Low growth 0.2 50 50 2.00 0.008
No growth 0.1 50 46 0.00 -0.008
Total expected
return 13.80%

c. What is the standard deviation of the returns?

Probabilit Price at End-of-Ye Annual Expected

State y, p(s) beginning ar Price Dividend HPR return Var
Super high
growth 0.1 50 62 3.00 0.3 0.03 0.002624400
High
growth 0.2 50 58 3.00 0.22 0.044 0.001344800
Normal
growth 0.4 50 56 2.00 0.16 0.064 0.000193600
Low
growth 0.2 50 50 2.00 0.04 0.008 0.001920800
No growth 0.1 50 46 0.00 -0.08 -0.008 0.004752400
13.80% 0.0108

Standard deviation = 10.41%

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Question 6 (2 points)

You earned a nominal rate of return equal to 11.7% on your investments last year. The annual inflation
rate was 2.3%. (Show your answers to 2 decimal places.)

a. What was your approximate real rate of return?

= Nominal rate -Inflation rate = 11.7%-2.3%
= 9.40%
b. What was your exact real rate of return?
Real Rate of Return = (1 + Nominal Rate of Return) / (1 + Inflation Rate) - 1
= (1+11.7%) -1
(1+2.3%)
= 9.19%

Question 7 (2 points)

A portfolio earned a rate of return equal to 18% last year with a standard deviation of 27%. Treasury
Bills returned 3%. (Show your answers to 2 decimal places.)

a. What is the portfolio’s excess return?

Excess return= Return on investment- Risk free return

=18%-3%= 15%

b. What is the portfolio’s Sharpe Ratio?

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation

= 18%-3%
27%
=55.56%

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This Section 3 (16 points) of your Individual Assignment covers Bond
Investments and corresponds to chapter 10 in the textbook. Answer all 7
questions, add space as required.

Question 1 (1 point)

A Treasury note is listed in WSJ as below. Calculate the bid-ask spread. (Show your answer to 4
decimal places.)

Maturity Mo
Rate Bid Asked Chg. Asked Yld.
/Yr

6.5 May 12n 108.1265 108.1644 +1 3.86

Bid-ask spread = Ask price - Bid price

= 108.1644 - 108.1265
= 0.0379
Bid-ask spread = 0.0379

Question 2 (1 point)

Suppose that you purchase a bond with a quoted price of $1,032 on January 15. The bond has a
coupon rate of 6.5% and pays interest on May 15 and November 15 of each year. The exact number of
days between November 15 and January 15 is 61, and the exact number of days between November
15 and May 15 is 181.

What is the invoice price of the bond? (Show your answer to 2 decimal places.)

Invoice price = Accrued coupon payment + Quoted price

Coupon payment amount = coupon rate / 2 * quoted price.

=6.50% x $1032.00 = $33.54

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Accrued coupon payment = (number of days past last payment / number of days to next
payment)*Coupon payment amount

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=61 x $33.54 = $11.30
181

=$1032.00+$11.30 = $1043.30

Question 3 (3 points)

You have purchased a convertible bond for $1,120. It is convertible into 50 shares of the firm’s common
stock. The current stock price is $18 per share. (Show your answer to 2 decimal places.)

a. What is the market conversion value of the bond?

Market conversion value = Conversion ratio x Current stock price

= 50 x $18
= $900

b. What is the conversion premium?

Conversion premium = bond value – conversion value

= 1120-900 = $ 220

c. Will you choose to convert the stock now?

Based on the stock's conversion premium, I would not convert the shares at this time because the
conversion value is less than the price at which the bond was initially purchased, producing a negative
conversion premium. Given the aforementioned information, my return would be negative if I converted
the shares.

Question 4 (3 points)

A bond has a par value of $1,000, 7 years to maturity, and a coupon rate of 4.3%? Coupon payments
are made semi-annually. (Show your answers to 2 decimal places.)

a. If the required rate of return is 5.2%, what is the value of the bond?

(Coupon payment / Discount rate) x (1-1/(1+ Discount rate)^Number of coupon payments) + Par value /
(1+Discount rate)^Number of coupon payments

=($21.50/2.60%) x (1-1/(1+2.60%)^14)+$1000.00/(1+2.60%)^14

=$947.75

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b. What is the bond’s value if the required rate of return increases to 6.2%?

If the required rate of return is 6.2% the value of the bond is $893.42 

=($21.50/3.10%)*(1-1/(1+3.10%)^14)+$1000.00/(1+3.10%)^14
=$893.42

c. What is the bond’s value if the required rate decreases to 4.2%?

If the required rate of return is 4.2% the value of the bond is $1,006.01

=($21.50/2.10%)*(1-1/(1+2.10%)^14)+$1000.00/(1+2.10%)^14
=$1006.01

Question 5 (4 points)

Two bonds are listed below. Coupon interest payments are made semi-annually and that par
value is $1,000 for both bonds. (Show your answers to 2 decimal places.)

Bond A Bond B

Coupon rate 5% 5%

Time to maturity 5 years 25 years

Required return 7.2% 7.2%

a. Calculate the values of Bond A and Bond B.

The value of bond A is: ($25.00/3.60%)*(1-1/(1+3.60%)^10)+$1000.00/(1+3.60%)^10 = $908.98.

The value of bond B is: ($25.00/3.60%)*(1-1/(1+3.60%)^50)+$1000.00/(1+3.60%)^50 = $746.58

b. Recalculate the bonds’ values if the required rate of return changes to 9.4%.

The recalculated value of bond A is: ($25.00/4.70%)*(1-1/(1+4.70%)^10)+$1000.00/(1+4.70%)^10

=$827.62
The recalculated value of bond B is: ($25.00/4.70%)*(1-1/(1+4.70%)^50)+$1000.00/(1+4.70%)^50
=$579.01

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c. Calculate the increase or decrease in bond value based on the change in required return.

A= $908.98-$827.62 = $81.36 decrease
B= $746.58-$579.01=$167.56 decrease

d. Explain what happened in c.

The amount of the final principal payment and the potential future cash flow that the bond delivers
together determine the bond's value. An inverse link exists between interest rates and bond values. As
interest rates rise, new bonds with higher interest yields provide a larger cash flow, which increases
their value and appeal. The value of both bonds declined by a certain amount as the needed rate of
return increased.

Question 6 (2 points)

a. What is the yield to maturity on a bond that you purchased for $1,249, assuming that the bond has
16 years to maturity, a par value of $1,000, and a coupon rate of 6.35%? The bond pays coupon
interest semiannually. (Show your answer to 4 decimal places.)

(Coupon rate + (Face value – Present value)/ number of compounding periods) / (Face value + Present
value) / 2

=(6.35%+(1000-1249)
1000+1249
2
=4.1974%

b. What is the effective annual yield on this bond? (Show your answer to 4 decimal places.)

(1+(Nominal rate / number of payments per year))^number of payments per year – 1

(1+(6.35%/2))^2-1

=6.4508%

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Question 7 (2 points)

Suppose you just purchased a bond (Face Value = $1,000) with 20 years to maturity that pays an
annual coupon of $40 and is selling at par. Calculate the one-year holding period return for each of
these three cases: (Show your answers to 4 decimal places.)

a. The yield to maturity is 5.5% one year from now.

=one-year holding period return is 26.7143%

b. The yield to maturity is 2.5% one year from now.

=one-year holding period return is -15.7101%

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This Section 4 (11 points) (Case) of your Individual Assignment covers Equity
Portfolio Investments and consists of the Beta Management Co. case.
Your submission will consist of concise answers to all questions below (related to the case: Beta
Management Co.) Maximum length of submission: 2 pages of text (at least single line spacing, Arial
11 font, margins as in this document) plus 2 pages for referenced (to your text) exhibits and/or
diagrams (if any). Best to use this document as a template – add/expand 2-4 pages.

Question 1 (3.5 points)

Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group
during the past two years.
The California REIT, Brown Group stocks, and Vanguard Index 500 Trust have respective standard
deviations of 4.45%, 9.04%, and 7.99%.

How variable are they compared to Vanguard Index 500 Trust ?

Both stocks appear to be very volatile when compared to the Vanguard Index 500 Trust, with standard
deviations of 9.04% and 7.99% as opposed to the index's 4.45%.

B, Which stock appears to be riskiest ?

The California REIT stock has a greater standard deviation (9.04%) than the Brown Group stock
(7.99%). Hence, the California REIT stock seems to be the riskiest.

Question 2 (4.5 points)

Suppose Beta’s position had been 99% of equity funds invested in the Index fund, and 1% in the
individual stocks. Calculate the variability of this portfolio using each stock.
a. How does each stock affect the variability of the equity investment ?
Based on the standard deviation of each portfolio that was calculated, it appears that the California
REIT stock lowers the standard deviation of the portfolio while the Brown Group stock does the
opposite.

b. Which stock is riskiest ?

The riskiest stock in the portfolio is represented by the Brown Group stock.

c. Explain how this makes sense in view of your answer to question 1 above ?
Even if this new information looks like it contradicts the answer to question 1, there is a reason why
the Brown Group stock is the riskiest. Question 1 concerns stock volatility but not stock-to-index
trust correlations. As a result, it is safe to make the assumption that the Brown Group stock's

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 tendency to increase the portfolio's standard deviation is a result of its strong correlation with the
Vanguard Index 500 Trust. The Vanguard Index 500 Trust, on the other hand, may have
experienced poor correlations with California REIT stocks, resulting in a lower standard deviation in
their portfolio.

Question 3 (3 points)

Perform a regression of each stock’s monthly returns on the Index returns to compute the Beta for each
stock ?
The betas for the stocks are 0.14 for the California REIT stock and 1.21 for the Brown Group stock.

a. How does this relate to the situation described in question 2 above ?

These betas are ideal for the situation described in the previous question. In this case, the Brown
Group stock has a beta of 1.21, which is more than one, indicating that it is vulnerable to the same
systematic risk as the Vanguard Index 500 Trust. Furthermore, the Brown Group stock beta shows
that the stock is more volatile than the Vanguard Index 500 Trust, meaning that the overall risk is
higher. With a beta of less than one, the California REIT stock goes in the opposite direction of the
Brown Group company, making it the safer of the two.

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