The Misadventures of Daring Dave: Leverage and Investment Returns

Abstract

Daring Dave is a focused niche case used in Darden's second year elective "Securities Markets in Action" where students need to understand the power and impact of leverage and margin requirements on investor performance. This case would also work well in case-based investments courses and courses on financial trading. This case considers the return and liquidity effects of leverage on investment returns for novice investor, Daring Dave, 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, levered positions.

Excerpt

UVA-F-1686

Rev. Jan. 31, 2014

THE MISADVENTURES OF DARING DAVE:

LEVERAGE AND INVESTMENT RETURNS

American jousting legend David Malory was preparing to charge Wall Street. Raised on a farm in southern Indiana, crowned midwestern champion on the semiprofessional U.S. tilting (ring jousting) circuit, and undefeated in two score tournaments over five winters, he was known as “Daring Dave,” and many a tale was told of his valor and cunning. At the top of his game, Dave had retired from tilting at rings to seek glory in a more lucrative field—stock investing.

With characteristic resolve, Dave sold his horse, suits of armor and regalia, lances, and other gear for just over $ 100,000, upon which he promptly relocated to New York City and threw himself into the study of equity prices. Within two weeks, he believed that he had a firm grasp on the mechanics of security trading.

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Keywords: leverage, margin, trading, liquidity