What are the potential strategies for investing $5000 in Swift Corporation's stock?
The potential strategies for investing $5000 in Swift Corporation's stock are:
a) Investing all $5000 in the stock
b) Borrowing $5000 from the broker and investing $10000 in the stock
c) Putting $5000 in a risk-free T-bill that gets 2 percent
d) Short selling $5000 of stock and putting all $10000 in T-bills that earn 2 percent
Investing $5000 in Swift Corporation's Stock
Payoffs:
If the stock price goes up to $120, the payoff is $6000 ($1000 profit).
If the stock price goes down to $90, the payoff is $4500 ($500 loss).
Returns:
Possible returns are $1000 profit or $500 loss.
Expected Return:
The expected return is $750.
Variance of Returns:
The variance is $62,500.
Borrowing $5000 from Your Broker and Investing $10000
Payoffs:
If the stock price goes up to $120, $7000 is left after paying back the broker.
If the stock price goes down to $90, $4000 is left after paying back the broker.
Returns:
Possible returns are $2000 profit or $1000 loss.
Expected Return:
The expected return is $1500.
Variance of Returns:
The variance is $125,000.
Putting $5000 in a Risk-Free T-Bill at 2 Percent
Payoffs:
After a year, $5100 is received ($100 interest).
Returns:
The return is $100 interest.
Expected Return:
The expected return is $100.
Variance of Returns:
There is zero variance in returns.
Short Selling $5000 of Stock and Putting All $10000 in T-Bills
Payoffs:
If the stock price goes up to $120, $4200 is left after buying back the shares and receiving interest.
If the stock price goes down to $90, $5700 is left after buying back the shares and receiving interest.
Returns:
Possible returns are $4200 or $5700.
Expected Return:
The expected return is $4950.
Variance of Returns:
The variance is $487,500.