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You have $30,000 in your margin account, and you want to invest in BMO stock




Question;You have $30,000 in your margin account, and you want to;invest in BMO stock. The minimum margin requirement for BMO is 30%. You just;got a quote on BMO as follows;Bid: 55.25;Ask: 55.26;The interest rate on the margin loan is 6% per annum.;1) If you;want to buy BMO in margin, what is the maximum number of shares can you buy?;2) Suppose;you want to buy 1200 shares of BMO in margin. Answer the following questions;a. What is;the initial margin ratio?;b. Suppose;you are going to hold the shares for one year. At what price at the end of next;year will your investment break even? (assuming no margin calls in the year);c. How far;could the stock price fall before getting a margin call?;d. If the;stock price falls to $40, you would get a margin call. If this happens, how;much new fund would you need to add to your account to respond the margin call?;SPY and XIU are ETFs tracking the S&P 500 and;S&P/TSX 60 index, which are often used as proxies for the US and Canadian;stock markets, respectively. From a set of their historical data, the annual;expected returns and standard deviations of those two ETFs and their covariance;are estimated as follows;SPY: E(r) = 0.36?=0.26 XIU: E(r) = 0.44?=0.28 Covariance;between= 0.0568;Suppose that you have $5 million to invest for one year and;you want to invest this money into SPY, XIU and the Canadian one-year T-bill.;Assume that the interest rate of the one-year T-Bill is 6% per annum.;Suppose that you have the following utility function;U=E(r) ??2;Answer following questions using EXCEL;1) Draw the;opportunity set offered by these two securities (with an increment of 0.01 in;weight).;2) What is;the optimal portfolio of SPY and XIU?;3) Determine;your optimal asset allocation among SPY, XIU, and T-Bill, in percentage and in;dollar amounts.;Using the Yahoo! Finance website, search the Bank of Nova;Scotia (BNS.TO) by finding its stock symbol. If you are unable to locate the;prices for BNS.TO, use prices for BNS (the Bank of Nova Scotia observed in US;dollars at the New York Stock Exchange). For the purpose of this question;assume that the Canadian dollar and the US dollar had been exchanged one for;one. Find historical prices for the stock (on the left-hand menu) and complete;the following;1. Download;historical data for the stock prices (adj. close) from January 1, 2004 through;January 1, 2012, on a monthly basis. You will also need to download;corresponding monthly prices for the S&P/TSX Comp index (also available on;the Yahoo! Finance site) as well as 3-month T-Bill rates (download this;attachment: T-Bill Rates.xlsx).;2. Calculate;returns for both series of prices downloaded from Yahoo site (BNS and S&P;/TSX Comp Index). Prior to that, make sure the data is sorted in ascending;order (i.e., first row has the oldest data). The final spreadsheet should have;the two series of returns you downloaded and calculated from Yahoo! Finance.;Make sure all data is expressed in same units.;3. Using the;Tools menu in EXCEL, (Tool Pack has to be installed if EXCEL does not show it);perform regression analyses using the Market Model for BNS.;4. Clearly;provide the regression results in a table with an explanation for the;coefficients obtained, and clear interpretation. Specifically, for each;regression provide;? Dependent;Variable;? Independent;Variable;? Intercept;? Beta;Value;? Firm;Specific Risk;i. How;well does the S&P/TSX Comp Index movement explain the variability of the;return on BNS stock?;ii. What is;the alpha of the BNS stock?;iii. Calculate;the standard deviation of the stock return (using the equation for R2;=?2?M2/?2, and the individual regression results).;iv. Calculate;systematic risk and firm specific risk for the stock.


Paper#52585 | Written in 18-Jul-2015

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