Question

A stock was purchased for $51 a share and sold eleven months later for $54 a share. If the shares were purchased totally with cash the holding period return would be _____ percent as compared to _____ percent if the purchase was made using 70 percent margin. Ignore trading costs and margin interest.

1. 5.56; 3.89

2. 5.56; 7.94

3. 5.88; 4.12

4. 5.88; 6.69

5. 5.88; 8.40

Answer 1

The holding period return on the stock is:

RETURN ON THE STOCK/INITIAL INVESTMENT

$54 - $51/51 * 100

=5.88%

Now, if the stocks were purchased at a margin of 70%,

the holding period return is :

$54 - $51/ 0.7* 51

$54 - $51/ $35.7

=8.4%.

So, the correct option is option 5.