Relationship between leverage and the magnitude of gains

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Reference no: EM131323919

If the stock is currently $60.90/share, up almost 5% since the beginning of the year. You believe that the stock price will rise as a result of a coming surge in healthcare spending in emerging market countries. You have $182,700 to invest and you use your capital and borrow the maximum allowable amount (under Regulation T) from your broker to purchase shares.

Your broker charges 3% on the margin loan. What is the one-year rate of return on your original investment for each of the 3 strategies if the stock price in one year is:

1) $48.72

2) $60.90

3) $73.08

What is the relationship between leverage and the magnitude of gains? What is the relationship between leverage and the magnitude of losses?

Reference no: EM131323919

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