The current market price for ABC is $70 per share. Initialmargin is 50%, maintenance margin is 35% and there is no margininterest. 1) You believe the stock price will decrease over the nextyear and wish to trade exactly one round lot. What trade should youmake ? How much margin would you have to post to youraccount ? At what price would you receive a margin call? 2) Suppose you are correct and the stock falls to $64 pershare at the end of the year. What is your percentage return onequity for this trade
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
The current market price for ABC is $70 per share. Initialmargin is 50%, maintenance margin is 35% and there is no margininterest.
1) You believe the stock price will decrease over the nextyear and wish to trade exactly one round lot. What trade should youmake ? How much margin would you have to post to youraccount ? At what price would you receive a margin call?
2) Suppose you are correct and the stock falls to $64 pershare at the end of the year. What is your percentage return onequity for this trade
Introduction:
Performing trading of securities on a margin would give the investor an opportunity to trade additional amount of shares by investing only a part of the cash. The increase or decrease in the price would decide whether the investor would receive a profit or a margin.
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