Question 4
The stock of ABC Inc is trading at $50. You short sold 350shares of ABC at this price. However, price increased to $55, atwhich point you decided to close the trade. What was yourpercentage return? The initial margin rate is 75%.
Question 5
Consider the short sale trade in the previous question. If yourbrokerage requires a maintenance margin of 40%, at what price willyou get a margin call? The initial margin rate is 75%.
Question 6
You find that in a normal year, the S&P500 index gives areturn of 12%. However, you think that there is a 40% probabilityof the economy going into recession next year. If that happens, youpredict that the index return will be 2%. What is the expectedreturn on the S&P500 next year?
