Jason Goff is a trader at Silico Partners, a hedge fund based in London. He buys

Question

Jason Goff is a trader at Silico Partners, a hedge fund based in London.
He buys 5,000 shares of a stock at $50 each.
He finances the purchase with 10% of the fund’s equity and the rest with a short-term loan at an interest of 2% per annum. After 3 months, he resells the shares at $52 and repays his loan with the interest due. Assume a 360-day year (12 months of 30 days each)

1) What is Goff’s net profit (loss) in dollars on this deal?

2) What is Goff’s annualized Return on Assets on this deal?

3) What is Goff’s annualized Return on Equity on this deal?

Explanation / Answer

Buying Price = 5000*50 = 250,000

Selling Price = 5000*52 = 260,000

Loan raised = 250,000*90% = 225000

Interest paid = 225000*2%*3/12 = 1125

Net Profit = 260,000-250,000-1125 = $8875

2)Annualised Return on Assets = (10,000/250,000)*12/3*100

=16%

3)Annualised Return on Equity = (8875/25000)*12/3*100

=142%

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