Introduction to Financial Accounting Assignment

Introduction to Financial Accounting - Assignment Example Investors adopt this trading strategy because they would want to make big profits in as less time as possible, particularly when they perceive stocks as being overpriced. To short sell, an investor must have a margin account with the broker, for which the investor has to meet the initial margin requirement which is a proportion of the total investment that has to be paid in cash. For e.g., if an initial margin requirement is 50% on the total investment of  £10, 000 then an investor has to pay  £5000 in cash which is initial margin deposit and can borrow the rest of the amount. 1(f) Margin trading is purchasing stocks by borrowing money from the broker. For margin trading, an investor would need a margin account which has a specific initial and maintenance margin requirement (Reilly and Brown, 2003, p. 128). Investors opt for margin trading because it provides them with financial leverage or in other words, increases their buying power. If the margin in the account falls below the maintenance margin, the broker calls the investor to put in more cash in the account so that the margin can be maintained. This is known as a margin call (Reilly and Brown, 2003, p. 128) Therefore the range of maintenance margin values within which I will not get a margin call is values lesser than  £184652.9 and equal to or greater than  £163052.75 during the entire investment period. 2 (d) In order to find out if diversification would reduce the risk of the portfolio, the correlation of assets must be studied (Reilly and Brown, 2003, p. 245). The greater the number of negatively correlated assets in a portfolio, the lesser will be the risk. RSS and BLT correlation coefficient is 0.3637 which shows that the two stocks are moderately correlated, that might not help much in diversifying the risk of the portfolio.