Assume you sell short 1000 shares of common stock at $35 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25/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

First, let's calculate the initial investment:
1000 shares x $35 per share = $35,000
Initial margin at 50% = $35,000 x 50% = $17,500

If you repurchase the stock at $25/share:
1000 shares x $25 per share = $25,000

Your profit would be:
$17,500 - $25,000 = -$7,500

Since you made a profit of $7,500 on an initial investment of $17,500, your rate of return would be:
($7,500/$17,500) x 100% = 42.86%

However, since this is a short position, your return is actually the inverse of the profit percentage:
100% - 42.86% = 57.14%

Therefore, the correct answer is C.

Assume You Sell Short 1000 Shares of Common Stock at $35