Question

Assume you sell short 100 shares of common stock at $50 per share, with an initial margin at 50%. The stock paid no dividends during the period, and you did not remove any money from the account before making the transaction. What would be your rate of return if you purchase the stock at $40 per share?

Answer 1

40%

Step-by-step explanation:

Initial amount invested = $50 × 100 × 50% = $2,500

Profit from sale and repurchase = ($50 - $40) × 100 = $1,000

Rate of return = $1,000 ÷ $2,500 = 0.40, or 40%.

Therefor, the rate of return would be 40%.