Question

You are bullish on Google stock. The current price is $1,075/share and you have $10,000 of your own to invest. You then borrow an additional $10,000 from your broker at an interest rate of 5% per year and invest a total of $20,000 in the stock. If Google does not pay a dividend, which of the following is TRUE?

A. All statements are true.

B. Margin enables investors to achieve higher returns, however, there is greater downside risk due to the leverage and interest cost.

C. If Google stock goes up by 20% over the next year, the total return on your investment is 35%.

D. If Google stock remains unchanged over the year, your return on investment would be -5%.

E. If Google stock declines by 20% over the next year, the total return on your investment is -45%.

Answer 1

Option A is correct

A. All statements are true.

We know that margin enables investors to achieve higher returns, however, there is greater downside risk due to the leverage and interest cost. Hence, Option B is correct

Returns in Option C=(20000/1075*1075*1.2-20000-10000*5%)/10000=35% Hence, Option C is correct

Returns in Option D=(20000/1075*1075-20000-10000*5%)/10000=-5% Hence, Option D is correct

Returns in Option E=(20000/1075*1075*0.8-20000-10000*5%)/10000=-45% Hence, Option E is correct