"Equity Investments":Margin purchase

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Questions 1:

Which of the following statements is most accurate concerning a short position of 100 shares of a stock at $50 per share?

A、 Maximum loss of $5,000

B、 Maximum gain of $5,000

C、 Unlimited maximum gain

Questions 2:

The following data pertain to a margin purchase of a stock:

Equity Investments:Margin purchase

If the stock is sold exactly one year after the purchase, the total return on this investment is closest to:

A、 22.4%.

B、 14.4%.

C 、19.4%.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. The potential gains on a short position are limited to no more than 100%; the potential losses are unbounded. The lowest market price per share an investor can repurchase the stock to return to the security’s lender is $0, so the maximum gain is ($50 – $0) × 100 = $5,000.

A is incorrect. The potential losses are unbounded because the market price that an investor can repurchase the stock to return to the security’s lender can go up with no limit. If the stock goes from $50 to $135 per share the loss would be $8,500.

C is incorrect. The potential gains on a short position are limited to no more than 100%: ($50 – $0) × 100 = $5,000.

【Answer to question 2】A

【analysis】

A is correct.

Equity Investments:Margin purchase