1. Robert is close to retirement and has savings of $200,000. Using these funds he creates a portfolio of largecap, dividendpaying stocks and investment grade corporate bonds. Robert would best be characterized as a (n):
A. hedger.
B. investor.
C. informationmotivated trader.
2. Alex has purchased 100 shares of a nondividendpaying firm on margin at a price of $60 per share. The leverage ratio is 1.5. Six months later, he sells these shares at $70 per share. What was the return to Alex during the sixmonth period, considering no transaction cost or interest on borrowing?
A. 16.67 percent.
B. 66.67 percent.
C. 25.00 percent.
3. Susan purchased 600 shares of a company XYZ at $22 per share. The stock was bought on 80percent margin. One month later, Susan had to pay interest on the amount borrowed at a rate of 4percent per month. At that time, Susan received a dividend of $0.60 per share. Immediately after that she sold the shares at $18 per share. She paid commissions of $5 on the purchase and $5 on the sale of the stock. What was the rate of return on this investment for the onemonth period?
A. 19.4 percent.
B. 20.4 percent.
C. 24.9 percent.
Answers: 
SelectShow 
1. B is correct. Robert is best characterized as an investor. Considering the level of his own risk aversion, he is just in investing in lowrisk assets. Since he is neither hedging any existing risk nor using information to identify and trade mispriced securities, he is not a hedger or an informationmotivated trader.
2. C is correct. The return is 25 percent. If the position had been unleveraged, the return would be 16.67% = (70 – 60)/60. Because of leverage, the return is 25% = 1.5 x 16.67%.
Another way to look at this problem is that the equity contributed by the trader (the minimum margin requirement) is 66.67% = 100% / 1.5. The trader contributed $40 = 66.67% of $60 per share. The gain is $10 per share, resulting in a return of 25% =10/40.
3. B is correct. The return is 20.4 percent.
Total cost of the purchase = $13,200 = 600 x $22
Equity invested = $10,560 = 0.80 x $13,200
Amount borrowed = $2,640 = 13,200 – 10,560
Interest paid at month end = $105.6 = 0.04 x $2,640
Dividend received at month end = $360 = 600 x $0.60
Proceeds on stock sale = $10,800 = 600 x $18
Total commissions paid = $10 = $5+ $5
Net gain/loss = $2,155.6 = 13,200 – 105.6+ 360 + 10,800 – 10
Initial investment including commission on purchase = $10,565
Return = 20.4% = $2,155.6/$10,565
