An investor uses 50% margin to invest, and the stock price rises by 10%. His rate of return (ignoring interest charges and dividends) would be

Question

Quizplus · Accepted Answer

With 50% margin, the investor is investing half of their own money and borrowing the other half. Therefore, their leverage amplifies the return on their own investment by a factor of 2. If the investment returns 20%, the investor's actual return would be 2 x 20% = 40%. However, since they only invested half of the money, the return on their own investment would be 20%. Therefore, the answer is B (20%).

An Investor Uses 50% Margin to Invest, and the Stock