Question

Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Answer 1

Answer:

Rate of return=0.222=22.2%

Explanation:

Price at which shares are sold=$45 per share

Number of shares=100 shares

Initial margin=50%=0.5

Price of share on repurchase=$40 per share

Required:

Rate of return if shares are repurchased=?

Solution:

Rate of return=$\frac{Profit}{Initial\ Investment}$

Profit earned=($45-$40)*100

Profit earned=$500

Initial Investment=(100*45)0.5

Initial Investment=$2,250

Rate of return=$\frac{500}{2250}$

Rate of return=0.222=22.2%