CFA CFA Level 1 holding period return confusion

# holding period return confusion

• Author
Posts
• pcunniff
Participant
• CFA Level 1
15

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 â€“ 40) / (40 Ã— 0.6) = 41.67%.

(Study Session 12, Module 36.2, LOS 36.f)

• Analyst0719
Participant
• CFA Charterholder
5

This is also a poorly written question because it doesn’t consider the interest that you have to pay back on the borrowed funds.

• 4

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%.

• pcunniff
Participant
• CFA Level 1
1

@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