You sold a stock short for $50 and maintained the position for two years dur- ing which the stock paid an annual dividend of $2. At the end of two years, you closed your position when the stock was selling for $35. The margin requirement for short sales was 100 percent, so you could not borrow any funds. Excluding the impact of commissions, what was the annual rate of return on this investment? 2. Your broker suggests that the stock of QED is a good purchase at $25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 8 percent annually. The firm’s beta coefficient is 1.34, and the yield on Treasury bills is 7.4 percent. If you expect the market to earn a return of 12 percent, should you follow your broker’s suggestion? Which Dow Jones Industrial Average stocks would be considered “dogs”? Deter- mine the Dow dogs as of January 1; invest $1,000 in each dog. At the end of a time period such as the semester or year, compare the dogs’ performance with the performance of the Dow. Be certain to remember to include the dividends in your calculation.
