An investment brokerage firm requires 40% margin to open an investment account.It charges 2% interest on margin borrowing.Transaction costs are 0.2% of the transaction amount each time. The stock price of SCP Co is $50 per share and since it has been rising, you think it will continue with the momentum and decide to buy 1,000 shares with the allowable margin.Your friend Cleo thinks the stock reached a maximum and it would fall and decides to short 1,000 shares by making the necessary margin deposits.During the year, SCP paid dividends of $1.80 per share.At the end of the year, the stock price fell to $48 and you and Cleo close your accounts.

a) what is your rate of return?

b) what is Cleo's rate of return?

Answer rating: 100% (QA)

To calculate the rate of return for both you and Cleo we need to consider the initial investment any dividends received transaction costs interest pai... View the full answer