CFA CFA Level 1 holding period return confusion

holding period return confusion

  • This topic has 3 replies, 3 voices, and was last updated Dec-20 by pcunniff.
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    • pcunniff
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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)

    • manteca
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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%.

    • Analyst0719
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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.

    • pcunniff
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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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