› CFA › CFA Level 1 › Calculating return on margin investments.

Calculating return on margin investments.

Reply
Login
  • This topic has 2 replies, 2 voices, and was last updated Jan-18 by RoyD.
  • Author
    Posts
    • RoyD
      Participant
      Forum Level 1 Summer Associate
      15 Jan 2018 at 5:49 am
      Up
      0
      Down

      I have a doubt since the CFAI practice exam and KS notes give a conflicting method. The CFAI suggests the formula is:
      Market value of stock – Loan amount / Investor’s own equity

      The KS notes suggest:
      Market Value of stock – Purchase Price (this numerator is basically capital gain) / Investor’s own equity

      Which one is correct?

    • justgo
      Participant
      Forum Level 1 Summer Associate
      21 Jan 2018 at 9:14 am
      Up
      2
      Down

      It´s both correct and not necessarily different. The first gives the result based upon 1+rate and the second one gives the rate.

    • RoyD
      Participant
      Forum Level 1 Summer Associate
      22 Jan 2018 at 2:42 pm
      Up
      3
      Down

      But you get two distinct answers. Since we are subtracting the Market Value of the Stock with only the Loan Amount according to CFAI, the return should be higher this way.
      The KS method subtracts Market Value of Stock with the Purchase Price so the return would be higher.

  • Author
    Posts
Viewing 2 reply threads
  • You must be logged in to reply to this topic.