The correct answer is C. The return on equity for a margin transaction is calculated by multiplying the unleveraged return by the financial leverage ratio. The financial leverage ratio is the reciprocal of the margin requirement (1 / margin). In this case, the financial leverage ratio is 1 / 0.30 = 3.3333. Therefore, the return on equity is 40% * 3.3333 = 133.33%, which is closest to 133%.

Why not A or B?

• A incorrectly calculates the return on equity as the unleveraged return multiplied by (1 + margin), resulting in 40% * 1.30 = 52%.
• B incorrectly swaps the numerator and denominator in the calculation, leading to 30% / 40% = 75%.