Reference no: EM133053059

Question - Investment Analysis and Portfolio management text book. The leverage ratio of a margin investment is the value of the asset divided by the value of the equity position. For example, an investor who satisfies an initial margin requirement of 50% equity has a 2-to- 1 leverage ratio so that a 10% increase (decrease) in the price of the asset results in a 20% increase (decrease) in the investor's equity amount.

Marks 15

Given the following information:

Shares purchased 1,000

Purchase price per share $100

Annual dividend per share $2.00

Initial margin requirement 40%

Call money rate 4%

Commission per share $0.05

Stock price after one year $110

Calculate (1) the leverage ratio and (2) the investor's return on the margin transaction (return on equity) if the stock is sold at the end of one year.