Year 2021 has just ended. You expect the price of Stock Quanz to increase by 13% in 2022. You have collected some historical return information of Stock Quanz and the overall market as indicated in the table below.
Year Stock Quanz (%) Market (%)
2017 12 6
2018 7 5
2019 11 12
2020 24 11
2021 14 4
a) Based solely on the capital asset pricing model (CAPM), should you invest in Quanz? Assume a market risk premium of 6.8% and risk-free rate of 3.2%.
b) Suppose you decide to purchase RM 50,000 worth of Stock Quanz using an initial margin of 40% at RM 2 per share, and borrow the remaining from a broker. Assume an interest rate of 7.5% p.a. for this margin facility. i) If the price drops to RM 1.50 by the end of the year, what is the percentage margin and the return on investment? ii) If you wish to earn a return of 30% this year, how much must the price increase to by the end of the year? iii) If the maintenance margin is 25%, how far could the stock price fall before you would get a margin call?
