Stacy purchased 500 shares of stock for $48 a share. She sold those shares six months later for $44 a share. The initial margin requirement is 80 percent and the maintenance margin is 40 percent. Ignore margin interest and trading costs. If she purchased the shares for cash her holding period return would be _____ percent as compared to _____ percent if she had used margin.

Question

Quizplus · Accepted Answer

The holding period return for cash purchase is calculated as [(44-48)/48]*100 = -8.33%. For margin purchase, the initial investment is 80% of 500*48 = $19,200. The loss is (44-48)*500 = -$2,000. The return on margin is (-2000/19200)*100 = -10.42%.

Stacy Purchased 500 Shares of Stock for $48 a Share