You believe that XYZ stock is currently overpriced and you wish to short sell the stock. Your broker requires an initial margin rate of 50% and a maintenance margin rate of 30%. You short sell 1,000 shares at the current price of $60 per share using the full amount of margin allowed.

a. What is the return on your investment if the stock price drops to $55 per share? (3 marks)

b. What is the return on your investment if the stock price rises to $70 per share? (3 marks)