CFA Level I · CFA Level I Exam · Equity Issuance and Trading
An investor buys 500 shares at $80 with 50% initial margin. One year later the price is $92. Ignoring interest, dividends and commissions, the return on the investor's equity is closest to:
The return on equity is about 30%. The investor puts up $20,000 of equity on a $40,000 purchase and earns a $6,000 gain when the price rises $12 on 500 shares. Dividing $6,000 by $20,000 gives 30%, twice the 15% price return.
- A15%
- B30%Correct
- C46%
Explanation
Cost = $40,000; equity = $20,000. Gain = 500 × $12 = $6,000. Return on equity = 6,000/20,000 = 30%. The 15% option is the unleveraged price return, which ignores leverage.
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