Your video-game addicted nephew tells you that the Nintendo Wii is much better than the Microsoft X-Box.To take advantage of this information,you decide to build a two asset portfolio by buying shares in Nintendo and selling shares short in Microsoft.For your long position you buy 1700 shares of Nintendo at a price of $40 per share.For the short position,you sell 1000 shares in Microsoft at a price of $35 per share.What is the portfolio weight for your short position in Microsoft?
A) -1.06
B) -0.94
C) 0
D) 0.34
E) 0.50

Question

Quizplus · Accepted Answer

The short position generates a positive cash flow, so your equity investment in the portfolio is the cost of buying Nintendo less the proceeds from selling Microsoft. Investment = Cost of buying Nintendo - Proceeds from selling Microsoft Investment = $68,000 - $35,000 Investment = $33,000 w_i = 11ea7fdb_fc0a_25a3_a768_0fa3e0070c6b_TB2902_11 The weight of Nintendo in the portfolio = 11ea7fdb_fc0a_25a4_a768_676ec983b466_TB2902_11 = 2.06 The portfolio weight on the Microsoft position = 11ea7fdb_fc0a_25a5_a768_45c066396177_TB2902_11 = -1.06 The weight on Microsoft is negative because it is a short position. Just to verify the weights: 2.06 + (-1.06) = 1.

Your Video-Game Addicted Nephew Tells You That the Nintendo Wii