1. Lauren has a margin account and deposits $50,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the gentry Shoe Corporation is selling at $35 per share.
a. How many shares can Lauren purchase using the maximum allowable margin? b. What is Lauren’s profit (loss) if the price of Gentry’s stock:
- rises to $45?
- Falls to $25?
c. If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will receive a margin call?
2. At a social gathering, you meet the portfolio manager for the trust department of a local bank. He confide to you that he has been following the recommendations of the department’s six analysts for an extended period and has found that two are superior, two are average, and two are clearly inferior. What would you recommend that he do to run his portfolio?
3. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following systematic risk measures (betas):