Answer:
Rate of Return is -41.67%
Explanation:
If initial margin is 60%, then the borrowed amount is 40%
Rate of Return =Profit / Initial Investment
where
Profit = Total Return − Initial Stock Value − Transaction Costs − Interest
And
Total Return = Ending Market Value + Dividend
Amount = 300 shares x $60 = $18,000
$18,000 * 0.40 = $7,200 Loan
And
Initial investment would be:
Initial Investment = $18,000 * 0.60
Initial Investment = $10,800
Therefore, the loan amounts to $18,000 and the initial investment would be $10,800
Proceeds after selling stock and repaying loan = (300 shares * $45)
= $13,500
= Proceeds after selling stock and repaying loan - Loan amount
= $13,500 - $7,200
= $6,300
Computing rate of return as:
Rate of Return = ($6,300 - $10,800) / $10,800
= - $4,500 / $10,800
= -0.4166
= - 41.67%
Ignoring the interest of margin, the Rate of Return is -41.67%
