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

Answer rating: 100% (QA)

SOLUTION If there is a 40 drop in the portfolio value the new portfolio value will be Geared ... View the full answer