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Short Sale - Return on Investment

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You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year.

1. At the end of one year you close out your short position by purchasing shares of XCorp at $45 per share. The commission is 1.25%. What is your rate of return on the investment?

2. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25% commission on the purchase)

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Solution Summary

The solution explains how to calculate the return on investment from a short sale.

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1. At the end of one year you close out your short position by purchasing share of XCorp at $45 per share. The commission is 1.25%. What is your rate of return on the investment?

Commission on short sale = 75X1.25%=0.9375
Commission on ...

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