Question

John Investor takes a short position on 10,000 shares of APPL, selling at $168.90 per share on Feb 14. Dividends are estimated at $20 per year paid quarterly and the last ex date was Jan 8. JQ's broker charges him $300 for the loan of the shares every 6 months. JQ covers his position on Aug 13 at $141.94

a)JQ's holding period rate of return on his investment is?

b) During the time JQ is in his short position, the rate of return on APPL shares is?

Answer 1

2 Dividends will be declared during the holding period of 6 months viz. in April and July.

Dividends are required to be paid for short position held.

a)

Holding Period Return = [Profit/Loss on Shares-Dividend Payable-Broker's Charges for Loan]/Investment

= [{(168.9-141.94)*10000}-{(5*2)*10000}-300]/[168.9*10000]

= 169300/1689000

= 0.1002 = 10.02%

b)

Rate of Return of Stock = [(Price on Aug 13-Price on Feb 14)+Dividends]/Price on Feb 14

= [(141.94-168.9)+(5*2)]/168.9

= -16.96/168.9

= -0.1004 = -10.04%