1. Suppose Best Buy stock is trading for $40 per share for a total market cap of $16 billion, and Walt Disney has 1.8 billion shares outstanding. If you hold the market portfolio, and as a part of it hold 100 shares of Best Buy, how many shares of Walt Disney do you hold? Please show your work.
2. Consider the price paths of the following two stocks over six time periods:
1 2 3 4 5 6
Stock 1 10 12 14 12 13 16
Stock 2 15 11 8 16 15 18
Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now it is time 3. Assume throughout this question that you do no trading (other than what is specified) in these stocks.
a. Which stock(s) would you be inclined to sell? Which would you be inclined to hold onto?
b. How would your answer change if right now is time 6?
c. What if you bought at time 3 instead of 1 and today is time 6?
d. What if you bought at time 3 instead of 1 and today is time 5?
3. Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of 2% a year up to $100 million. After that her skills are spread too thin, so cannot add value and her alpha is zero. Half Dome charges a fee of 1% per year on the total amount of money under management (at the beginning of each year). Assume that there are always investors looking for positive alpha and no
investor would invest in a fund with a negative alpha. In equilibrium, that is, when no investor either takes out money or wishes to invest new money.
a. What alpha do investors in Davita's fund expect to receive?
b. How much money will Davita have under managerment?
c. How much money will Half Dome generate in fee income?