Question

You are bullish on AAPL stock. The current price is $175/share and you have $5,000 of your own to invest. You then borrow an additional $2,500 from your broker at an interest rate of 7.5% per year and invest a total of $7,500 in the stock. If AAPL does not pay a dividend, what is your return if AAPL stock remains unchanged over the year? +7.5% Can't be determined from information provided 0% -3.75% -7.5%

Answer 1

Hello,
As per the details given in the question

Option B is correct.
Because if we take a Loan of $2500 from broker @ 7.5%, and the stock price remain same at the end of year,
we not only have loose interest 7.5% of $2500 but also loose the risk free return provided by the Government security on amount $5000 if we deposit the amount into banks or invest in t-bills.
The rate of return of T-bills was missing.
Total return can't be determined from this information.
If we ignore the RF return then option would be -7.5%.

I hope this clear your doubt.

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