Department of Economics and Finance
Investment Analysis, Problem Set 1, Dr. Samar Issa
Answer all the questions below. Make sure that you show all the steps leading to the answers. For each numeric answer, you should show the formula or equation from which you have arrived at the answer. Points will be deducted for missing steps, but points will be awarded for steps that are correct.
You can write directly on this sheet or submit a handwritten pdf scanned copy.
Due Date: Sunday 10/10. This Problem set is over 10%.
1. John began his investing program with a $5,500 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar-weighted average return?
Time Investment Return
0 $ 6,500 7.5 %
1 $ 2,500 – 4.0 %
2 $ 3,100 5.0 %
3 $ 3,000 8.0 %
4 $ 800 – 1.5 %
IRR=
2. The stock of Advanced Industries is trading at $32. You feel the stock price will decline, so you short 1000 shares at an initial margin of 70%. If the maintenance margin is 30%, at what share price will you receive a margin call?
3. A stock produced annual returns of 8.5, -18, 15, 17, and 12 percent over the past five years, respectively. What is the geometric average return?
4. Downtown Industries common stock had returns of 5.2, 10.3, 9.3, and 9.5 percent, respectively, over the past four years. What is the standard deviation of these returns?
How!?
5. Eileen just sold a stock and realized a 6.25 percent return for a 7-month holding period. What was her annualized rate of return?
6. One year ago, you purchased 300 shares of stock at a cost of $6,000. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for $22.50 each. What is the capital gains yield on this investment? What is the dividend yield? What is the total rate of return on the investment?
7. You short sold 700 shares of a stock at $25 a share. The initial margin requirement is 75 percent and the maintenance margin is 35 percent. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?
