$\begin{array}{|c|c|c|}
\hline \text { Day } & \begin{array}{c}
\text { BHP price } \
\text { (end of day) }
\end{array} & \begin{array}{c}
\text { ANZ price } \
\text { (end of day) }
\end{array} \
\hline \text { Monday } & \$ 18.20 & \$ 24.50 \
\hline \text { Tuesday } & \$ 19.00 & \$ 24.80 \
\hline \text { Wednesday } & \$ 17.80 & \$ 25.90 \
\hline \text { Thursday } & \$ 16.55 & \$ 26.00 \
\hline
\end{array}$
-Consider the end of day prices for ANZ and BHP for Monday through Thursday.Suppose an investor short sells BHP and buys ANZ,what will the continuously compounded return be on the investor's combined position if the investments have equal weight?

Question

Quizplus · Accepted Answer

Short selling amounts to borrowing the share and then repaying the share at a later date.In this case,the investor will effectively borrow (and sell)the share at the Monday price of $18.20 and then purchase the share at the Thursday price of $16.55.Hence,the continuously compounded return to the investor for BHP is ln(18.20/16.55)= 0.095 or 9.5%.The bought position in ANZ will generate a return over the period of ln(26.00/24.50)= 5.94%.Therefore,the equally weighted return to the investor will be (0.095 + 0.0594)/2 = 0.0772 or 7.72%.

-Consider the End of Day Prices for ANZ and BHP