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MC short selling and efficient portfolio choices

1- You wish to sell short 100 shares of XYZ Corporation stock. If the last two transactions were at 34.10 followed by 34.15, you only can sell short on the next transaction at a price of :

a. 34.10 or higher.
b. 34.15 or higher.
c. 34.15 or lower.
d. 34.10 or lower.

2- Stocks A, B, and C have the same expected return and standard deviation. The following table shows the correlations between the returns on these stocks.

Stock A Stock B Stock C
Stock A _1.0
Stock B _0.9 _1.0
Stock C _0.1 _0.4 _1.0

Given these correlations, the portfolio constructed from these stocks having the lowest risk is a portfolio:

a. Equally invested in stocks A and B.
b. Equally invested in stocks A and C.
c. Equally invested in stocks B and C.
d. Totally invested in stock C.

Solution Preview

1, b. 34.15 or higher. When selling short the idea is that you sell "borrowed" shares today in hopes that the price goes down, then you close the short sell by buying at the lower price. This is a strategy if you believe the stock is really overpriced and will fall or you speculate that it will fall for other ...

Solution Summary

MC addressing short sales and building most efficient portfolios given correlations.