Case Notes/Answers
THE MISADVENTURES OF DARING DAVE LEVERAGE
AND INVESTMENT RETURNS by Michael
Discussion Questions:
1. Monday. What is the expected cash flow for a 1,000-share short sale? If Dave had used
the broker’s entire extended margin loan, how many shares could Dave have purchased
Monday morning? What is Dave’s total return as of the end of day on Monday? Using the
brokerage statement, explain the mechanics of margin accounting.
2. Tuesday. What is the average price of Dave’s position as of the end of day on Tuesday?
What is Dave’s total return as of the end of day on Tuesday? What would his return have
been if he had not borrowed on margin?
3. Wednesday. What would Dave’s equity be if the price of KNIGHT had increased to
$15.00? Did Dave have any other alternatives to selling 9,000 shares at $9.00? What is
Dave’s total return as of the end of day on Wednesday?
4. Thursday. Could Dave have sold fewer than 5,000 shares and met the margin call? What
is Dave’s total return as of the end of day on Thursday?
5. Friday. Given that Dave had indeed been right on the stock (KNIGHT was up 10% on
the week), why did he lose so much money? What would Dave’s return have been had he
not borrowed on margin? Was borrowing Dave’s fundamental mistake?
, UV6588
Rev. Nov. 21, 2013
THE MISADVENTURES OF DARING DAVE:
LEVERAGE AND INVESTMENT RETURNS
Teaching Note
This case considers the return and liquidity effects of leverage on investment returns for
Daring Dave, a novice investor, in a single equity security. Through a play-by-play description
of Dave’s investment experience over a single week, students are introduced to the mechanics of
trading on margin, margin calls, and the value of liquidity for risky, leveraged positions.
Teaching Objectives
1. Explore the mechanics of trading on margin, margin accounting, and margin calls.
2. Introduce students to the motives for margin loan terms from the perspective of securities
brokers.
3. Build appreciation for the importance of liquidity for risky, leveraged positions.
Student Assignment
Students may consider the following study questions:
1. Monday. What is the expected cash flow for a 1,000-share short sale? If Dave had used
the broker’s entire extended margin loan, how many shares could Dave have purchased
Monday morning? What is Dave’s total return as of the end of day on Monday? Using the
brokerage statement, explain the mechanics of margin accounting.
2. Tuesday. What is the average price of Dave’s position as of the end of day on Tuesday?
What is Dave’s total return as of the end of day on Tuesday? What would his return have
been if he had not borrowed on margin?
THE MISADVENTURES OF DARING DAVE LEVERAGE
AND INVESTMENT RETURNS by Michael
Discussion Questions:
1. Monday. What is the expected cash flow for a 1,000-share short sale? If Dave had used
the broker’s entire extended margin loan, how many shares could Dave have purchased
Monday morning? What is Dave’s total return as of the end of day on Monday? Using the
brokerage statement, explain the mechanics of margin accounting.
2. Tuesday. What is the average price of Dave’s position as of the end of day on Tuesday?
What is Dave’s total return as of the end of day on Tuesday? What would his return have
been if he had not borrowed on margin?
3. Wednesday. What would Dave’s equity be if the price of KNIGHT had increased to
$15.00? Did Dave have any other alternatives to selling 9,000 shares at $9.00? What is
Dave’s total return as of the end of day on Wednesday?
4. Thursday. Could Dave have sold fewer than 5,000 shares and met the margin call? What
is Dave’s total return as of the end of day on Thursday?
5. Friday. Given that Dave had indeed been right on the stock (KNIGHT was up 10% on
the week), why did he lose so much money? What would Dave’s return have been had he
not borrowed on margin? Was borrowing Dave’s fundamental mistake?
, UV6588
Rev. Nov. 21, 2013
THE MISADVENTURES OF DARING DAVE:
LEVERAGE AND INVESTMENT RETURNS
Teaching Note
This case considers the return and liquidity effects of leverage on investment returns for
Daring Dave, a novice investor, in a single equity security. Through a play-by-play description
of Dave’s investment experience over a single week, students are introduced to the mechanics of
trading on margin, margin calls, and the value of liquidity for risky, leveraged positions.
Teaching Objectives
1. Explore the mechanics of trading on margin, margin accounting, and margin calls.
2. Introduce students to the motives for margin loan terms from the perspective of securities
brokers.
3. Build appreciation for the importance of liquidity for risky, leveraged positions.
Student Assignment
Students may consider the following study questions:
1. Monday. What is the expected cash flow for a 1,000-share short sale? If Dave had used
the broker’s entire extended margin loan, how many shares could Dave have purchased
Monday morning? What is Dave’s total return as of the end of day on Monday? Using the
brokerage statement, explain the mechanics of margin accounting.
2. Tuesday. What is the average price of Dave’s position as of the end of day on Tuesday?
What is Dave’s total return as of the end of day on Tuesday? What would his return have
been if he had not borrowed on margin?
