Which of the following would offer the best return on investment? Assume that yo

Question

Which of the following would offer the best return on investment? Assume that you buy $7,000 in stock in all three cases, and ignore interest and transaction costs in all your calculations. Buy a stock at $65 without margin and sell it 1 year later at $85. Buy a stock at $45 with 50% margin and sell it 1 year later at $50. Buy a stock at $55 with 75% margin and sell it 1 year later at $70.

A) Buy a stock at $65 without margin and sell it 1 year later at $85.

B) Buy a stock at $45 with 50% margin and sell it 1 year later at $50.

C) Buy a stock at $55 with 75% margin and sell it 1 year later at $70.

Explanation / Answer

Buy a stock at $65 without margin and sell it 1 year later at $85. Returns=85/65-1=30.77%

Buy a stock at $45 with 50% margin and sell it 1 year later at $50. Returns=(7000/45*50-7000)/(7000*50%)=22.22%

Buy a stock at $55 with 75% margin and sell it 1 year later at $70. Returns=(7000/55*70-7000)/(7000*75%)=36.36%

hence select Option A) Buy a stock at $65 without margin and sell it 1 year later at $85.

This provides maximum returns

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.