When buying assets, Sarahs hedge fund, like many others, prefers to invest as little of their own capital as possible. This means that when they buy assets, they buy them on margin if they can. Buying on margin means buying with some of your own funds and paying for the rest of the purchase with borrowed funds. Just as is the case when you short stocks, when you buy them on margin the most you can borrow is 50% of the value of the stock, which of course means that you must contribute margin (your equity) of at least 50% of the value of what you are buying. There is also a 25% maintenance margin requirement for long (buy) positions.

If Sarah purchased 1,000 shares of BEAR stock on margin at $37.25 and the price subsequently moved to $42 per share, by what percentage would the equity in the trade increase?

10.7%

25.5%

12.0%

29.7%