Q3

i) Total market value = 300shares x $50 = $15,000

ii) A 50% initial margin means that the amount to borrow is 50% of total market value
=> 50% x 15,000 = $7,500
Therefore, the amount to borrow is $7,500
iii) The value of equity is therefore,
$15,000 - $7,500 = $7,500
Assuming stock price increases by 20%, the new stock price is 120% x $50 = $60
i) This implies that the current total market value = 300 shares x $60 = $18,000.
ii) A 50% initial margin means that the amount to borrow is 50% of total market value
=> 50% x 18,000 = $9,000
Therefore, the amount to borrow is $9,000.
iii) The value of equity = $18,000 - $7,500 = $10,500.

Q5a
The total market value of the stocks can be calculated as follows:
Stock A: 1000000 x 10 = $10,000,000
Stock B: 6000000 x 15 = $90,000,000
Stock C: 5000000 x 20 = $100,000,000
Therefore, the total market value of all stocks combined is $10,000,000 + $90,000,000 +
$100,000,000 = $200,000,000

Q5b

Q6a
For all values of r1,2:

E(Rport) = (.6 x .10) + (.4 x .15) = .12

port = √(. 6)2 (. 03)2 + (. 4)2 (. 05)2 + 2(.6)(.4)(.03)(.05)(𝑟1,2 )

= √. 000324 + .0004 + .00072(𝑟1,2 )

= √. 000724 + .00072(𝑟1,2 )

a. = √. 000724 + .00072(1.0) = √. 001444 = .0380

b. = √. 000724 + .00072(.75) = √. 001264 = .0356

c. = √. 000724 + .00072(.25) = √. 000904 = .0301

d. = √. 000724 + .00072(.00) = √. 000724 = .0269

e. = √. 000724 + .00072(−.25) = √. 000544 = .0233

f. = √. 000724 + .00072(−.7) = √. 000184 = .0136

g. = √. 000724 + .00072(−1.0) = √. 000004 = .0020

Q6b
This implies that adding equal increments of risk as we move up the efficient frontier
gives diminishing increments of expected return.