Question

Stacy purchased 500 shares of stock for $36 a share. She sold those shares six months later for $32 a share. The initial margin requirement is 80 percent and the maintenance margin is 30 percent. Ignore margin interest and trading costs. If she purchased the shares for cash her holding period return would be ________ percent as compared to ________ percent if she had used margin.

Answer 1

a) - 11.11%

b) - 13.88%

Step-by-step explanation:

Given:

Number of shares purchased = 500

Cost of per share = $ 36

Selling cost of the shares = $ 32

Initial marginal requirement = 80 %

Maintenance margin = 30 %

Now,

the Holding period return without using the margin = ($ 32 - $ 36) / $ 36 = - 11.11%

also,

Holding period return using the margin = ($ 32 - $ 36) / ($ 36 × 0.8) = - 13.88%