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 percent interest rate.If the stock's value decreases by 10 percent 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 $4,000 borrowed at 7.0% interest. So, her initial investment is $1,000.
After one year, the stock has decreased by 10%, which means its value is now $4,500. Sharon has to sell the stock to pay back the borrowed money with interest.
Total amount to repay = $4,000 + ($4,000 x 7.0%) = $4,000 + $280 = $4,280
Amount she receives after selling the stock = $4,500
So, her net loss is $4,280 - $1,000 = $3,280
Her rate of return is the net loss divided by the initial investment, expressed as a percentage:
Rate of return = ($3,280 / $1,000) x 100% = 328%
But since the rate of return is negative, it means that she incurred a loss. Therefore, her rate of return is: 
Rate of return = -78%
Hence the best choice is C.

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