CFA Level I · CFA Level I Exam · Equity Issuance and Trading
An investor buys 500 shares at $60 per share with an initial margin requirement of 50%. The share price rises to $72. Ignoring interest and commissions, the investor's return on her equity is closest to:
The return on equity is about 40%. The investor puts up $15,000 and earns a $6,000 gain on a 20% price rise. With 50% margin, leverage is two times, doubling the 20% price return. The 20% option ignores leverage.
- A20%
- B30%
- C40%Correct
Explanation
Cost = 500 × $60 = $30,000; equity = $15,000. Gain = 500 × $12 = $6,000. Return on equity = 6,000 / 15,000 = 40%. The 20% option is the unleveraged price return.
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