Question

Company XYZ’s stock price for the following dates:

May 12 2019               42

August 12 2019                       44

November 12 2019      49

May 12 2020               46

Investor A bought on May 12 2019 and sold today, with zero margin (i.e., leverage ratio 1).

Investor B bought on August 12 and sold today, also zero margin.

Investor C bought May 12 2019 and sold August 12, posting 30% margin.

Investor D sold short November 12 and bought back (covered short) today, posting 50% margin.

XYZ pays no dividend.  The financing rate (and earnings rate on collateral) is 2.5%.  

What is each invertor’s ROI?  2 points each

Answer 1

Investor A:

Buy price-42

Sell price-46

Profit= 46-42/42

=9.52%

Investor B:

Buy price-44

Sell price-46

Profit= 46-44/42

=4.76%

Investor C:

Buy price-42

Sell price-44

Margin 30%

So using Margin investor c can purchase 3 share

Profit= (44-42)*3/42

=14.29%

Investor D:

Short Nov -49

Bought back-46

Margin-50%

usig margin Investor D can purchase 2 share

Profit= (49-46)*2/42

=14.29%

If consider Financing Rate:

Investor A : 9.52-2.5 = 7.02%

Investor B : 4.76-2.5 = 2.26%

Investor C : 14.29-2.5 = 11.79%

Investor D : 14.29-2.5 = 11.79%