Assume you sell short 100 shares of common stock at $45 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.

Question

Quizplus · Accepted Answer

The initial margin is 50%, meaning you put down $2,250 (50% x 100 x $45) as collateral to sell short the 100 shares at $45/share.

Your total initial investment (equity) is $2,250.

To close out your position, you need to buy back the 100 shares at $40/share. This will cost you $4,000.

The proceeds from the short sale were $4,500 (100 shares x $45/share).

Your profit is the difference between the proceeds and the cost of buying back the shares:

Profit = $4,500 - $4,000 = $500

Your rate of return is the profit divided by your initial investment:

Rate of return = ($500/$2,250) x 100% = 22.22% or 22% (rounded to nearest whole percent).

Therefore, the answer is C) 22%.

Assume You Sell Short 100 Shares of Common Stock at $45