Question

Suppose you buy 100 shares of stock XYZ at $10 a share with a
margin of 50%. You also buy 200 shares of stock ABC at $50 a share
with an 60% margin. You are very sure that,
* in six month*, the price
of the first stock would be $15 because you got insider
information, but you are not so sure about the price of the second
stock. Suppose you want to achieve a 20% return from your
portfolio, then the price of the second stock needs to be at least
how much to achieve that goal. (Assuming the broker charges you an
6% margin loan interest and the stocks pay no dividend)

$51.68 |
||

$52.68 |
||

$53.68 |
||

$54.68 |

Answer #1

**Stock XYZ:**

- Buy Value = $10 * 100 = $1,000
- Sell Value = $15 * 100 = $1,500
- Interest Paid = 3% * (50% * $1,000) = $15 {3% as 6% is annual interest}
- Net Profit = $500 - $15 =
**$485**

**Stock ABC:**

- Buy Value = $50 * 200 = $10,000
- Interest Paid = 3% * (60% * $10,000) =
**$180**{3% as 6% is annual interest} - Total Investment of Portfolio = $1,000 + $10,000 = $11,000
- Total Profit required = 10% of $11,000 = $1,100 {10% as 20% is annual interest}
- Expected profit in stock ABC = $1,100 - $485 + $180 = $735
- Profit per share = $735 / 200 = $3.68

Hence, the price of the second stock needs to be at least $50 +
$3.68 = **$53.68**

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