Brokerage account at same time with same brokerage firrm

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Reference no: EM131301943

You and your friend opened a brokerage account at the same time with the same brokerage firm a year ago. At that time, each of you bought $10, 000 worth of shares of XYZ stock on margin. However, out of $10, 000 each of you needed for your initial purchases, your friend borrowed $2, 000 and you borrowed $5, 000 from the brokerage firm. (a) Right now, XYZ stock is up 4% from a year ago and both of you decide to get out of your XYZ holdings. Which of the investments, yours or your friend's, has a higher holding period return? Explain. Assume the brokerage firm charges 5% interest on its margin loan. You can either verbally explain your answer or you can use some computations to justify your answer. (b) If the brokerage firm charges a lower interest rate on its margin loans, would you reverse your answer to (a)? Explain.

Reference no: EM131301943

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