Returns on two stocks, A and B in a five business day week are as follows: Retur
ID: 2702242 • Letter: R
Question
Returns on two stocks, A and B in a five business day week are as follows:
Returns
Day
Stock A
Stock B
01
20%
- 23 %
02
3 %
9%
03
- 18 %
7 %
04
11 %
31 %
05
7%
14 %
a. Calculate average returns, variances, and standard deviations for stock A and B.
b. Explain which stock is more risky referring to their variances and standard deviations.
c. Calculate one-day holding period return, two day holding period return, three-day holding period return, four day holding period return and five day holding period return for stock A and B and fill up the following table.
Returns (in %)
Day
Stock A
Stock B
1 - day Holding Period Return
3 - day Holding Period Return
5 - day Holding Period Return
Explanation / Answer
Day Trading Margin Requirements: Know the Rules
We are issuing this investor guidance to provide some basic information about day trading margin requirements and to respond to a number of frequently asked questions that we have received. We also encourage you to read our Notice to Members and Federal Register notice about the rules.
Summary of the Day-Trading Margin Requirements
The rules adopt a new term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.
The rules permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day. If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader. The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.
In addition, the rules require that any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls remain in the pattern day trader's account for two business days following the close of business on any day when the deposit is required. The rules also prohibit the use of cross-guarantees to meet any of the day-trading margin requirements.
Frequently Asked Questions
Why the change?
The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities. It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading.
Most margin requirements are calculated based on a customer's securities positions at the end of the trading day. A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would otherwise result in a margin call. Nevertheless, the same customer has generated financial risk throughout the day. The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader's largest open position (in dollars) during the day, rather than on his or her open positions at the end of the day.
Were investors given an opportunity to comment on the rules?
The rules were approved by the NASD Regulation Board of Directors and then filed with the Securities and Exchange Commission (SEC). On February 18, 2000, the SEC published NASD's proposed rules for comment in the Federal Register. The SEC also published for comment substantially similar rule changes that were proposed by the New York Stock Exchange (NYSE). The SEC received over 250 comment letters in response to the publication of these rule changes. Both the NASD and NYSE filed with the SEC written responses to these comment letters. On February 27, 2001, the SEC approved both the NASD and NYSE day-trading margin rules. As noted above, the NASD rules became operational on September 28, 2001.
Definitions
What is a day trade?
Day trading refers to buying then selling or selling short then buying the same security on the same day. Just purchasing a security, without selling it later that same day, would not be considered a day trade.
Does the rule affect short sales?
As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the same day, it is considered a day trade.
Does the rule apply to day trading options?
Yes. The day trading margin rule applies to day trading in any security, including options.
What is a pattern day trader?
You will be considered a pattern day trader if you trade four or more times in five business days and your day-trading activities are greater than six percent of your total trading activity for that same five-day period.
Your brokerage firm also may designate you as a pattern day trader if it knows or has a reasonable basis to believe that you are a pattern day trader. For example, if the firm provided day trading training to you before opening your account, it could designate you as a pattern day trader.
Would I still be considered a pattern day trader if I engage in four or more day trades in one week, then refrain from day trading the next week?
In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five-day period. This is because the firm will have a "reasonable belief" that you are a pattern day trader based on your prior trading activities. However, we understand that you may change your trading strategy. You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account.
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