Question

A stock was purchased for $51 a share and sold eleven months later for $54 a share. If the shares were purchased totally with cash the holding period return would be _____ percent as compared to _____ percent if the purchase was made using 70 percent margin. Ignore trading costs and margin interest. (Hint: Assume you purchase 10 shares on margin for margin trading case).

Answer 1

Answer: 5.88%; 8.40%

Step-by-step explanation:

In finance, the holding period return is simply the return that a portfolio or an asset has accrued during the entire period that the asset or portfolio was being held. It is a way of measuring the performance of an investment.

Based on the information that have been provided in the question,

HPR without margin will be:

= ($54 - $51)/$51

= $3/$51

= 0.588

= 5.88%

HPR with margin will be:

= ($54 - $51)/($51 × 0.70)

= $3/($35.7)

= 0.84

= 8.40%