Tuesday, October 6, 2009

Margin Question on Combined Equity

Let's enjoy a fun question on margin accounts:

One of your investors has both long and short stock positions in her margin account. Today, if the value of the long positions increases by $4,000 and the value of her short positions increases by $2,000, the combined equity will
A. increase by $6,000
B. increase by $2,000
C. decrease by $2,000
D. decrease by $6,000

EXPLANATION: remember that you want the value of a short position to drop. It’s nice that the long position advanced $4,000, but that was reduced by the $2,000 advance in the short position’s value


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