Margin Transaction Rate of Return Calculation | CFA Level 1 Exam Preparation

Margin Transaction Rate of Return Calculation

Prev Question Next Question

Question

An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. If the shares of stock later sold for $200 per share, what is the rate of return on the margin transaction?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

A

200 shares at a cost of $100/share is $20,000 (i.e., 200x100). With a 40% initial margin requirement, the cost of the investment would be $20,000x0.4=$8,000.

When the shares are sold, the portfolio is worth $40,000 ($200x200). Hence, the rate of return would be [(40,000/8,000)-1]x100 = 400%.

Prev Question Next Question