There is a 50% change of the CBA share price rising to $120 in three months and a 50% chance of the CBA share price falling to $90 in three months. The maintenance margin is 30%. The interest rate for borrowing on margin over three months is 3% (Le. 12% per annum). 

CBA is not expected to pay any dividends in the next three months  which investor has the lowest expected return? Why?

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CBA shares are currently trading at a price of $105. Two different investors have a holding period of thre months and $10,500 to invest. They make the following decisions: a) Clive decides to buy CBA shares using a margin loan, with a 50% margin. b) Scott decides to short-sell CBA shares with a 50% margin. c) Anthony decides to buy CBA shares without margin. CBA shares are currently trading at a price of $105. Two different investors have a holding period of thre months and $10,500 to invest. They make the following decisions: a) Clive decides to buy CBA shares using a margin loan, with a 50% margin. b) Scott decides to short-sell CBA shares with a 50% margin. c) Anthony decides to buy CBA shares without margin.

Answer rating: 100% (QA)

Lets first calculate the expected return for each investor under each possible scenario Scenario 1 CBA share price rises to 120 Clive buys CBA shares ... View the full answer