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# holding period return confusion

MilwaukeePosts: 30 Associate

Can someone explain this? I thought the holding period return formula was End Value/Beg Value - 1?

An investor purchased 725 shares of stock at \$40 per share and posted initial margin of 60%. He subsequently sold the shares at \$50 per share. Based only on this information, the investor's holding period return is closest to:

A)40%.

B)20%.

C)25%.

Explanation

(50 – 40) / (40 × 0.6) = 41.67%.

(Study Session 12, Module 36.2, LOS 36.f)

• L1 candidate Posts: 2 Associate

Holding period return is:

Profit / Capital

Profit per share = \$50 - \$40 = \$10

Capital per share = \$40 * 60% initial margin = \$24

Holding period return = 10 / 24 = 41.7%

The investor is investing with a margin account, which means they're only putting up 60% of the capital, hence \$40 * 60%.

• United StatesPosts: 20 Associate

This is also a poorly written question because it doesn't consider the interest that you have to pay back on the borrowed funds.

• MilwaukeePosts: 30 Associate

@manteca makes more sense now. I think I just was reading too fast and didnt see the margin piece. Clearly its not the full return