Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A) −33.33%
B) −25.63%
C) −57.14%
D) −77.23%

Question

Quizplus · Accepted Answer

The rate of return on a short sale is calculated as (Initial Price - Final Price) / Initial Margin. Here, you sold the stock at $30 and repurchased at $35, making a loss of $5 per share on 100 shares, totaling a $500 loss. The initial margin required was 50% of $30 * 100 shares = $1500. Thus, the rate of return is ($500 loss / $1500 initial margin) = -33.33%.

Assume You Sell Short 100 Shares of Common Stock at $30