Assume That MM's Perfect Capital Markets Conditions Are Met and That

question 101

Multiple Choice

Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock.The number of shares of Without stock you purchased is closest to:

• A)1650
• B)425
• C)2000
• D)825
• E)200

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Definitions:

Market Conditions

The environmental and economic factors that affect the supply and demand, prices, and the success of businesses within a particular market.

Portfolio Proportions

The percentage composition of different assets within an investment portfolio.

Target Rate Of Return

The specific return that an investor aims to achieve on an investment, which guides their selection of investment vehicles and strategies.

Actuarial Rate

The rate developed by actuaries based on statistical data, used in calculating insurance premiums and pension contributions.