The prices and other information of two stocks in the market are listed in the table:
Stock BHP: Price at year beginning ($50) Forecasted price at year end ($52) Forecasted dividend in the year ($3) Variance of returns (9%) Stock CBA: Price at year beginning ($100) Forecasted price at year end ($111), Forecasted dividend in the year ($8) Varince of return (16%).
You have $100 of your own money that you are going to invest in the market according to one of two trading strategies. In strategy A, you use margin purchase by borrowing an amount of money that is equal to your own money with an interest charge of 10%. In strategy B, you are allowed to short sell stocks that the value of the short position is equal to your own money. Then you are able to use your own money and the proceeds from short sale for further investment. Assume no margin deposit requirement and no other fee charge. The correlation coefficient of returns between the two stocks is 0%.
Required: (1) If you use strategy A (margin purchase), what is the maximum total $ return and rate of return achievable on your own money (i.e.: calculated on your investment)?
(2) If you use strategy B (short sale), what is the maximum total $ return and rate of return achievable on your own money (i.e.: calculated on your investment)?
(3) Assume that you have unlimited money and you do not borrow money or short sell stocks, what is the expected return and risk (standard deviation) of your global minimum risk portfolio with the investment in the two stocks?