What is the rate of return on margined position

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Assume that Nike is trading at 80$ per Share. You buy 400 shares using $25,000 of your own money and borrowing the remainder of the purchase price from your broker. The annual rate on the margin loan is 5%

a) What is the rate of return on your margined position if one year later Nike shares will be selling at $72 ? Returns with 2 decimals.

b) If you had used only your equity to buy this stock (no borrowed capital) what would be the rate of return? ( Returns with 2 decimals) Worse or better? Borrowing capital increased or reduced the risk in this position? Explain it using the returns calculated in a) and b).

Reference no: EM132396830

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