CFA CFA Level 1 holding period return confusion

holding period return confusion

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    • Avatar of pcunniffpcunniff
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        • CFA Level 1
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        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)

      • Avatar of Analyst0719Analyst0719
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          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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          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%.

        • Avatar of pcunniffpcunniff
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            @manteca makes more sense now. I think I just was reading too fast and didnt see the margin piece. Clearly its not the full return

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