BUS329: How would you evaluate the informational role of the financial market: Investment Analysis Assignment, MU,, Singapore

Assignment Details:

1. (a) How would you evaluate the informational role of the financial market during the recent COVID-19 pandemic around the globe?

(b) Can you transfer/defer your today’s consumption into the future? Explain the mechanism of how this can be done.

2. (a) Stock market around the world is affected by COVID-19 pandemic. As an experienced investor, you decide to take advantage of it. Currently, the stock of ABC Ltd. is selling for $40 per share, which was trading at $45 one week earlier and you are certain that the price will fall further. To take advantage of this downward price momentum you sell short 1000 share of ABC Ltd at the current market price. You want to make $5000 profit from this short selling. You place an order with your broker to purchase the shares at a certain price to cover the position. What type of order did you place with your broker and at what price? Explain why.

(b) Continue from 2(a) above. You borrowed 1000 shares of ABC Ltd from your broker and sell short. The initial margin is 50%. Your broker informs you that a margin call will be issued if your equity falls below $13,500. How much can the price of ABC Ltd rise before you get a margin call? What is the maintenance margin in your account?

3. (a) “Capital allocation line (CAL) must always be a straight line” – Is this statement true? Explain with examples.

(b) Can the proportion of optimal investment in a risky portfolio (in a portfolio of one risk-free asset and one risky portfolio) be different for different investors? Explain with examples.

4. (a) There are two tasks in portfolio choice problem:

(i) determination of the optimal risky portfolio and

(ii) capital allocation. These two tasks are independent, or one is separate from the other. Explain why.

(b) Suppose that the expected return and standard deviation of stock A are 10% and 5% respectively, while the expected return and standard deviation of stock B are 15% and 10% respectively. Returns of stock A and B are perfectly negatively correlated. Also suppose that it is possible to borrow at the risk-free rate. What must be the value of the risk-free rate?

5. (a) As a result of the current COVID-19 pandemic, stock markets around the globe have become volatile. As an investor you perceive that the markets are going to experience significant movements in the near future; however, you are not sure about the direction of such movements. The markets may go up or go down. In such uncertain circumstances, what type of option strategy would you recommend to follow? Explain why.

(b) The common stock of the ABC Corporation has been trading in a narrow range, around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price of a 3-month put option with an exercise price of $50 is $4.

(i) if the risk-free rate is 10% per year, what must be the price of a 3-month call option on ABC stock at an exercise price of $50 if it is at the money? (Assume put-call parity holds and the stock pays no dividend).

(ii) What would be a simple option strategy using a put and call to exploit your conviction about the stock price’s future movements? Explain clearly.

(iii) How far can the stock price move in either direction before you lose money?