Homework Help: Anonymous

Posted by Anonymous on Wednesday, April 2, 2008 at 9:37pm.

9. What will be the investor’s return if a stock rises by 7% if purchased on 50% margin?

10. What will be the investor’s return if a stock falls by 9% if purchased on 60% margin?

11. What is the investor’s profit on a short sale at $45 if covered at a price of $30?

Anonymous - economyst, Thursday, April 3, 2008 at 9:36am
I suggest you work out an example. Buy $100 of stock at 50% margin means $50 comes out of the investor's pocket, the other $50 is borrowed. The stock rises to $107, the stock is sold, the loan is repaid plus interest (of amount r). So investor is left over with ($57-r). Since the initial investment was 50, the rate of return is (57-r)/50. If the turn-around time is short (say one day), then r will be very small and the rate of return will be nearly 14%. Not bad for one day.

Take it from here.

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