Question

Suppose you have $10,000 in cash to invest. You decide to sell short $5000 worth of Kinston stock and invest the proceeds from your short sale, plus your $10,000 into one-year U.S. treasury bills earning 5%. At the end of the year, you decide to liquidate your portfolio. Kinston Industries has the following realized returns: ​ P0 Div1 P1 Kinston $25.00 $1.00 $29.00 The return on your portfolio is closest to: 13.5% -2.5% 14.5% -0.5%

Answer 1

Answer:

The return of the portfolio is -2.5%.

Explanation:

You invest your 10,000 and the 5,000 obtained in the short (total 15,000) into one-year bills with 5% rate. At the end of the year, you will have 15,000 * 1.05 = $15,750. Total gain is equal to $750.

In the other hand, the stock is valued at $25 at the beggining, so the shor of $5,000 is equal to 5,000/25 = 200 shares. You have a negative dividend of $1 each share (total of $200) and a lost of $4 each share (total of $800). Total lost is equal to $1,000.

Net return is equal to $750 - $1,000 = -$250. In percent, -250/10,000 = -0,025 = -2,5%.