Pete Pablo has $20,000 to invest. He is very optimistic about the prospects of two companies, 919 Brands Inc. and Diaries.com. However, Pete has a very pessimistic view of one fi rm, a fi nancial institution known as Lloyd Bank. The current market price of each stock and Pete's assessment of the expected return for each stock appear below
|
Stock
|
Price
|
Expected Return
|
|
919 Brands
|
$ 60
|
10%
|
|
Diaries.com
|
80
|
14%
|
|
Lloyd Bank
|
70
|
-8%
|
a. Pete decides to purchase 210 shares of 919 Brands and 180 shares of Diaries.com. What is the expected return on this portfolio? Can Pete construct this portfolio with the amount of money he has to invest?
b. If Pete sells short 100 shares of Lloyd Bank, how much additional money will he have to invest in the other two stocks?
c. If Pete buys 210 shares of 919 Brands and 180 shares of Diaries.com, and he simultaneously sells short 100 shares of Lloyd Bank, what are the resulting portfolio weights in each stock? (Hint: The weights must sum to one, but they need not all be positive.)
d. What is the expected return on the portfolio described in part (c)?