Answer to Question #163162 in Finance for Tila Masinge

Question

An investor invests $10000 in stocks trading at $100. If the price for these shares goes up by 30% and ignoring dividends, what would be the investor’s expected rate of return? Assuming the investor borrows another $10000 from a broker and invests in the same stocks to buy more of the same shares and the margin loan interest is 9% per year, what will his rate of return be now if the stocks goes up by 30%, ignoring dividends, again ? Suppose the investor only borrows $5000 at the same interest rate of 9% per year, what will the rate of return be if the share price goes up by 30%? If it goes down by 30%, and if it remains unchanged? 

Answer 1

$Rate of return=ending value of investiment- multiply by 100$

$=(10000*130)-(10000*100)/(10000*10)*100$

$=30$

When share price goes up by 30%$=30*20000-900/(20000*100)*100$

$=30$

When share price goes up by 30%

$=30*1500-900/(100*15000)*100$

$=30$

When share price reduces by 30%

$=-30*15000-900/(100*15000)*100$

$=-30$

When share price remains unchanged

$=0*15000-900/(100*15000)*100$

$=-0.06$