Case Study Deutsche Company

Question 1:

a) Deutsche bank

There where huge movements in the equity market with regards to both deutsche bank and Samsung. Because of certain reports and rumours that the JoS ( US Justice System ) was going to impose a fine of 14 billion on Deutsche bank, its stocks where plunged to the ground, hitting an all-time low on September 30. The motive for this gargantuan fine was the misselling of Asset backed Securities leading to the financial crisis. It also did not help the fact that the fine in itself, that of 14 billion was almost the same market value of the bank itself with the looming fear that Germany’s central bank might have to bail the bank out.

Samsung

The main reason for Samsung‘s stock price movements was the recent recall of its

Share prices are constantly changing and every day prices will adapt according to market conditions. If there is a greater demand for a company’s particular shares and there are more investors willing to buy rather than sell, shares prices would increase. However conversely can happen as in the case of both deutsche bank and Samsung. In this case more people were willing to sell their shares because of expectation of future events and current events. Fear and recent events were the main culprit for both companies. With both having negative news, investors hurried to sell their stock before it falls down in price, leaving both companies with very low share

Risk of buy-ins – Buy-ins occurs when a broker ends short positions in difficult-to-borrow stocks simply because its lenders demand back their stocks. This is a major risk of short selling since it is very unpredictability and may lead to unforeseen losses for the short seller.

Question 4

Portfolio Actual Average Return (%) Standard Deviation Beta

Manager A 10.20 12.00 1.20

Manager B 8.80 9.90 0.80

Market portfolio 5% and Risk - free rate is 4.50%

a) CAPM portrays what rate of return one needs in order to rate equity risk on a particular security. It is calculated using the following formula

E(ri)= rf +β (rm – rf)

Using the above formula to calculate the CAPM for both managers we obtained the following results.

Manager A: E(ri)= rf +β (rm – rf)

E(ri)= 4.50% + 1.20(5%)

E(ri)= 4.50% + 6%

E(ri)= (10.5%)

Manager B: E(ri)= rf +β (rm – rf)

E(ri)= 4.50% + 0.80(5%)

E(ri)= 4.50% +4%

E(ri)= (8.5%)

So the above is a calculation of the CAPM for both managers. The Expected Return of Manager A was found to be 10.5% whilst that of Manager B resulted to be