Stacy purchased 400 shares of stock for $38 a share. She sold those shares six months later for $34 a share. The initial margin requirement is 80% and the maintenance margin is 40%. Ignore margin interest and trading costs. If she purchased the shares for cash, her holding period return would be ________% as compared to ________% if she had used margin.

Question

Quizplus · Accepted Answer

For cash purchase, the holding period return (HPR) is calculated as (Sale Price - Purchase Price) / Purchase Price. Here, it is (34 - 38) / 38 = -4 / 38 = -10.53%. For the margin purchase, the equity investment is 80% of the purchase price, so the investment is 0.8 * 38 = $30.40 per share. The loss is still $4 per share, but now it's over the initial investment of $30.40 per share, so the HPR is -4 / 30.40 = -13.16%.

Stacy Purchased 400 Shares of Stock for $38 a Share