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Up15
Can someone explain this? I thought the holding period return formula was End Value/Beg Value – 1?
An investor purchased 725 shares of stock at $40 per share and posted initial margin of 60%. He subsequently sold the shares at $50 per share. Based only on this information, the investor’s holding period return is closest to:
A)40%.
B)20%.
C)25%.
Explanation
(50 – 40) / (40 × 0.6) = 41.67%.
(Study Session 12, Module 36.2, LOS 36.f)
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Up5
This is also a poorly written question because it doesn’t consider the interest that you have to pay back on the borrowed funds.
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Up3
Holding period return is:
Profit / Capital
Profit per share = $50 – $40 = $10
Capital per share = $40 * 60% initial margin = $24
Holding period return = 10 / 24 = 41.7%
The investor is investing with a margin account, which means they’re only putting up 60% of the capital, hence $40 * 60%.
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