Assume that Sharon purchases $5,000 worth of a stock.To do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate.If the stock's value decreases by 10% in one year and she has to sell the stock at that time, what is her rate of return?

Question

Quizplus · Accepted Answer

Sharon purchased $5,000 worth of stock with $1,000 of her own money and borrowed the remaining $4,000 at a 7.0% interest rate. This means she pays $280 in interest for the year ($4,000 x 0.07). After one year, the stock's value decreased by 10%, meaning it is now worth $4,500 ($5,000 x 0.90). Sharon has to sell the stock to pay off her loan, so she receives $4,500 and uses $4,280 to pay off her loan, leaving her with $220. Her rate of return is calculated as follows: ($220/$1,000) x 100% = -78%. Therefore, the correct answer is C, which represents a negative rate of return of 78%.

Assume That Sharon Purchases $5,000 Worth of a Stock