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Suppose you have $10,000 to invest and purchase 200 shares of IBM stocks at $100 per share by borrowing $10,000 from the broker.

• The interest rate on the margin loan is 9% per year.

• What would be the rate of return on your investment if IBM stock goes up by 30% by year's end?

The portfolio weights on IBM stock and the risk-free asset is:

wIBM= Total Investment in IBM / Own Contribution =?

wF= Amount Borrowed / Own Contribution =?

The return on this leveraged portfolio (buying on margin) is:

rP= wIBMrIBM + wFrF = ?

If the price of IBM stock goes down by 30%

rP= wIBMrIBM + wFrF= ?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91543923

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