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Up::0
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 equityThe KS notes suggest:
Market Value of stock – Purchase Price (this numerator is basically capital gain) / Investor’s own equityWhich one is correct?
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Up::3
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. -
Up::2
It´s both correct and not necessarily different. The first gives the result based upon 1+rate and the second one gives the rate.
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