The following table is prepared by Sylvia. Sylvia makes an investment in the Australian equity market index
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Question:
The following table is prepared by Sylvia. Sylvia makes an investment in the Australian equity market index using her own fund of $200,000 and a margin loan that provides $100,000. If there is a 40% drop in her portfolio value, compute the net portfolio value and the loan to value (LVR) ratio for her geared portfolio. What is the rate of return of her investment with gearing?
Geared Portfolio Ungeared Portfolio
Initial investment 200,000 200,000
Borrowed Fund 100,0000 0
Portfolio Value 300,000 200,000
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