Question

Pete Pablo has $20000 to invest. He is very optimistic about the prospects of two companies, 919 Brands and Diaries.com. However, Pete has a very pessimistic view of one company, a financial institution known as Star Bank. The current market price of each share and Pete’s assessment of the expected returns for each share are below

a) Pete decides to purchase 210 shares of 919 Brands and 180 shares of Diaries.com. What is the expected return on his portfolio? Can Pete construct this portfolio with the amount of money he has?
b) If Pete sells short 100 shares of Star Bank, how much additional money will he have to invest in the other two shares?
c) If Pete buys 210 shares of 919 Brands and 180 shares of Diaries.com, and he simultaneously sells short 100 shares of Star Bank, what are the resulting portfolio weights in each share? What is the expected return on the portfolio?

Answer 1

a. Total investment (inthis portfolio)based on his decision:

(210*60)+(180*80)=

27000

Expected return on the above portfolio=(Sum of Weights(value) to total*Respective exp.return) --of both stocks

ie((210*60)/27000*10%)+((180*80)/27000*14%)=

12.13%

NO

Reqd. 27000 > 20000 he has.

b. By selling short, 100 shares of Star Bank, he will have an additional money of

100*70= 7000

to invest in the other two stocks.

c. Expected return on the portfolio:
No.of shares	Price/share	Total value	Wts. Of values to total value	Exp.Ret.	Wts. *exp.Ret.
210	60	12600	63.00%	10%	6.30%
180	80	14400	72.00%	14%	10.08%
100			0.00%	-8%	0.00%
-100	70	-7000	-35.00%	-8%	2.80%
		20000	1		19.18%
Expected return= 19.18%