Principles of investment

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Week 1 Assignment

BUS405 Principles of investment

James Prentice

Esteban D Soza

January 26, 2015

Suppose having the available capital of $28,000 to invest in the Miller-More Equine

Enterprises also known as MME. A $28,000 investment will furnish a total of 700 shares,

this can be determine by dividing the total amount invested by the price of each individual

stock ( 28,000/40= 700). A call option of $40 strike price. The investment of 28,000 will

be able to yield 7,000 shares ( $40 X 700= $28,000)

Six months from the initial investment MMEE matures and the selling price per share

reaches $48 , making your initial investment of $28,000 now worth $33,600 within the six

months of maturity( this can be determine by simply multiplying 700 shares X $48 =

33,600). By subtracting $33,600-$28,000 you can determine the total gain of the

investment for six months($5,600). The total gain can be also express as a percentage by

dividing $5,600/28,000= 20%. It is important to understand the need to annualize the

return of the initial investment by taking into account that in one year there is two periods

of six month each for one year. It can be determine that the effective annual return for the

investment of $28,000 is 44%. The effective annual return can be calculated by using this

formula.

1+ EAR = 1.202 = 1.44 or EAR = .44 = 44%

However, if we look at a different scenario where at the six month mark the shares for