Allan purchased 500 shares of stock on margin for $31.75 a share and sold the shares five months later for $34.50 a share.The initial margin requirement was 65 percent and the maintenance margin was 30 percent.The interest rate on the margin loan was 8.5 percent.He received no dividend income.What was his holding period return?

Question

Quizplus · Accepted Answer

Initial investment = 500 × $31.75 × 0.65 = $10,318.75 Loan repayment = [500 × $31.75 × (1 - 0.65)] × (1.085)^{5 / 12} = $5,748.36 HPR = [(500 × $34.50) - $5,748.39 - $10,318.75] / $10,318.75 = 11.46 percent

Allan Purchased 500 Shares of Stock on Margin for $31