Byron Stewart believes that shares of Clever Computer are underpriced compared t
ID: 2645490 • Letter: B
Question
Byron Stewart believes that shares of Clever Computer are underpriced compared to shares of other high tech stocks. He therefore decides to purchase $10,000 of Clever Computer stock. However, Byron is a bit worried that high-tech stocks could generally be overpriced. To hedge the position he took on as being overpriced compared to stocks in comparable companies. There is a 50% margin requirement on the short sale, and the margin account pays 5% annual effective interest. Suppose that Byron's concern was justified and that on the average high-tech stocks lose 30% of their value over the year that Byron maintains his long position with Clever Computer and his short position with Silly Chip. If Clever Computer loses 10% of its value during the year, Silly Chip loses 35% of its value during the year, and neither stock declares any dividends, what is Byron's yield for the year? You should assume that Byron sells the Clever Computer stock at the end of the year and also closes out his short position on Silly Chip at that time.
Answer should be 7%
Please show work Thanks!
Explanation / Answer
the loss on clever computer is 10%
profit on silly chips is 35%
the factor is that you clearly mentioned the investment in clever computer is $10,000 so the loss will be $1000 on clever computers.
but you havent mentioned the short position value in Silly chips, only given number is 35% losses its value. as he is holding a short position, he may get profit of 35% on silly chips.
if you were given the investment value, i may give the exact number of return in $ and in per cent also.
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