Question

You purchase 200 shares for $70 a share ($14,000), and after a year the price falls to $80. Calculate the percentage return on your investment if you bought the stock on margin and the margin requirement was (ignore commissions, dividends, and interest expense): 20 percent

Answer 1

Answer: First, calculate the total value of the shares after the price fall to $80:

value = 200 shares * $80/share = $16,000

Then, calculate the amount of money borrowed:

borrowed = $14,000 / (1 - margin requirement)

= $14,000 / (1 - 0.20)

= $14,000 / 0.80

= $17,500

Finally, calculate the percentage return on investment:

return = (value - borrowed) / borrowed * 100%

= ($16,000 - $17,500) / $17,500 * 100%

= -6.06%

The return on investment is -6.06%, meaning that the investment lost 6.06% of its value.

Explanation: