Question

Catherina makes an investment in the Australian equity market index using her own fund of $200,000...

Catherina makes an investment in the Australian equity market index using her own fund of $200,000 and a margin loan that provides $100,000. The following table is prepared by Catherina. If there is a 40% rise in her portfolio value, compute the net portfolio value and the loan to value (LVR) ratio for her geared portfolio. What is the rate of return of her investment with gearing?

Geared Portfolio

Ungeared Portfolio

Initial Investment

200,000

200,000

Borrowed Fund

100,000

0

Portfolio Value

300,000

200,000
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Homework Answers

Answer #1

Solution a) For geared portfolio:

Initial portfolio value = $300,000

Rise in the portfolio value = 40%

Thus, ending portfolio value = $300,000*(1+40%)

= $420,000

Solution b) Loan to value Ratio (LVR) = Value of loan/Portfolio value

Initial LVR = 100000/300000 = 33.33%

Final portfolio value = $420,000

LVR = 100000/420000 = 23.81%

Solution c) Initial investment = $200000

Loan amount = $100,000

Final portfolio value = $420,000

Equity amount after paying loan = $420,000 - $100,000

= $320,000

Investor rate of return = (320,000 - 200000)/200000

= 120,000/200000

= 0.6 = 60%

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