Shorting a stock, where you only make money if the stock goes down, has never been a successful investment strategy, based on the case studies we reviewed in class.

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The statement being evaluated is: 'Shorting a stock, where you only make money if the stock goes down, has never been a successful investment strategy, based on the case studies we reviewed in class.'

Option 1: True. This would assert that shorting stocks has never been a successful strategy. In reality, historical and case study evidence show that short selling can be profitable under certain conditions, such as identifying overvalued assets, timing market declines, or incorporating robust risk controls. Therefore, claiming it has never been successful misrepresents the observed outcomes and ignores instances where knowledgeable traders have profited from declines.

Option 2: False. This option contends that the original statement is not accurate. The rationale here is that short selling can and has led to profits when stocks decline, and case studies have documented successful short theses and strategies. The claim that it has never been successful overlooks these counterexamples and the nuanced risk/reward profile of short investments.

In short, the assertion in option 1 is overly absolute and contradicted by real-world scenarios where short positions yielded gains, while option 2 correctly flags the overgeneralization in the original statement.

ORLJ4002001 Exam 2: Finance

Shorting a stock, where you only make money if the stock goes down, has never been a successful investment strategy, based on the case studies we reviewed in class.

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Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and assume no other transaction costs.

How does a short seller "cover" a short?

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