Question

# Suppose you buy 100 shares of stock XYZ at \$10 a share with a margin of...

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

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.