Assume you purchase a stock on margin, and compare your returns with a cash purchase. If the stock return is positive, the effect of margin will make your return _____ than if you had purchased the stock with cash. If the stock return is negative, the effect of margin will make your return _____ than if you had purchased the stock with cash.
A) lower; lower
B) lower; higher
C) higher; higher
D) higher; lower
E) insufficient information

Question

Quizplus · Accepted Answer

When you purchase a stock on margin, you borrow money from your broker to invest in the stock, thus increasing your buying power. Therefore, if the stock's return is positive, the effect of margin will amplify your return, making it higher than if you had purchased the stock with cash. On the other hand, if the stock's return is negative, the effect of margin will magnify your losses, making your return lower than if you had purchased the stock with cash.

Assume You Purchase a Stock on Margin, and Compare Your