Exhibit 4.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 35

Multiple Choice

Exhibit 4.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60% and the commission on the sale is $50 and the broker charges 10% annual interest. AMF Corporation paid a $0.50 per share dividend while you were short the stock. After one year you cover your short sale at $35 per share with a $50 commission for the purchase.
-Refer to Exhibit 4.8.What is your annual rate of return on this investment?

• A) 18%
• B) 24%
• C) 25%
• D) 36%
• E) 37%

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Definitions:

Incubation

The process in problem-solving where an individual sets the problem aside for a while, allowing the subconscious to work on it.

Verification

The process of confirming the truth, accuracy, or validity of something, often involving the examination of evidence or conducting tests.

Satisficing

A decision-making strategy that entails choosing an option that meets a minimum level of satisfaction, rather than the optimal solution, due to constraints such as limited information or time.

Prospect Theory

A behavioral economic theory that describes how people make decisions between alternatives that involve risk, where the potential for losses influences choices more than equivalent gains.