Calculating Margin Return

C

Candice1010

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
  1. Hi all, I have a questino with this problem.. I don’t understand why it’s not 200% return. Thanks.
  2. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return to the trader during the six-month period?
    1. 20 percent.
    2. 33.33 percent.
    3. 50 percent.
 
What’s your initial investment?
What’s your profit?
The return is profit / investment.
 
initiail investment is $20, profit is $40. That’s why I thought it’s supposed to be 200%.
 
But initial investment was only $20, and they sold it for $60, why is profit $60-$50? How come the extra $30 due to leverage is not considered?
Thanks.
 
You have to pay back your loan of $30 dollars before you earn any profit
 
Purchase Your equity (20) + Your loan (30) = total (50)
At Sale: Original equity (20) + Your loan (30) + Gain (10) = total (60)
Pay back your loan: Total (60) - loan (30) = 30 = Original equity (20) + gain (10)
 
Candice1010 wrote:But initial investment was only $20, and they sold it for $60, why is profit $60-$50? How come the extra $30 due to leverage is not considered?
Click to expand...
I kinda figured that the people who lent you the $30 would want it back.
Call me crazy.
 
Yayyywork wrote:
Purchase Your equity (20) + Your loan (30) = total (50)
At Sale: Original equity (20) + Your loan (30) + Gain (10) = total (60)
Pay back your loan: Total (60) - loan (30) = 30 = Original equity (20) + gain (10)
Click to expand...
this makes sense, however when I did the problem I calculated orignial use of debt to be 71.5% of the investment from the given 2.5 levergae ratio. looks like your solution and the correct answer involves a 60% orignial investment with debt.
How did you get 60%?
I got 71.4% by doing this…… leverage ratio = debt/equity = 2.1/1………. debt/ debt+equity = 2.5/ 3.5 =71.4%
 
KMeriwetherD wrote:
this makes sense, however when I did the problem I calculated orignial use of debt to be 71.5% of the investment from the given 2.5 levergae ratio. looks like your solution and the correct answer involves a 60% orignial investment with debt.
How did you get 60%?
I got 71.4% by doing this…… leverage ratio = debt/equity = 2.1/1………. debt/ debt+equity = 2.5/ 3.5 =71.4%
Click to expand...
Leverage ratio is not D/E it is D+E/E . You get this quickly by 1/LR –> 1/2.5 –> .4.
Verify that with your original trade: Equity 20, Total position: 50 50/20 = 2.5
 
You must log in or register to reply here.
Back
Top