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essentials of investments

Questions and Answers of Essentials of Investments

Why do investors invest in whiskey, fine wine, or art alternatives?
What are some of the benefits and risks of including alternative investments in an asset portfolio?
REITs are both listed and traded on exchanges and also nontraded. What could be some of the risks of investing in nontraded REITs?
In 1997, the first weather derivative was created in the US. Weather derivatives are simply financial instruments used to control unanticipated (adverse) weather conditions (such as hurricanes,
Suppose a friend of yours who is already in the investments area approached you and proposed that you invest in cultivable land in other parts of the world. Do you think this would be a good idea as
In the US and many economies around the world, highways, bridges, schools, and hospitals, to name a few, are in bad shape and in need of urgent and significant repairs. How will governments be able
We read lately in the financial press that some mining companies will begin paying dividends in gold or silver and not in cash. Some companies exchanged US dollars into metal in order to mint one
Assume that you purchase a $100 million 7.65% par value 5-year bond of a BBB-rated company and that you enter simultaneously into a 5-year interest-rate swap with your bank. You agree to make fixed,
What are credit default swaps and what are their benefits?
Assume that the spot rate for the euro/US dollar exchange rate is currently $1.40 and the British pound/US dollar exchange rate is $1.55.a. What is the cross-exchange rate?b. If you find the
What is carry trade and what are the risks of such an investment strategy?
What is the difference between a covered interest parity and uncovered interest parity?
Do you need to trade futures or remain asleep every night to understand what the markets are doing globally?
Below are some current market news on commodities. Please predict the movement in the futures market.a. A late November 2019 report that trade talks between Beijing and Washington are progressing
Below are several pieces of news regarding the commodity and financial futures markets.Please answer the questions that follow.On Thursday, December 1, 2011, the US Energy Department’s Energy
Assume that the September futures price of wheat is $2.50 per bushel and the December price is $2.55 per bushel. You expect the positive price differential to widen in the next few months.a. What
World oil prices (and futures, both in Europe and New York) soared, mirroring the performance of global equities and a somewhat weaker US dollar. Can you explain this inverse relationship between oil
Currently (as of the third quarter of 2011), there are renewed concerns that the United States and Europe will plunge into a second slowdown, which would reduce demand for industrial metals (such as
The passage below is from the financial press.Oil rose for a second day in New York on speculation that European governments will resolve their sovereign debt crisis, moderating the region’s
Which factors determine the price of financial futures contracts? What is the impact of the opportunity cost?
Following the above problem, what would be the implications if the spot and futures prices were not equal?
Assume that the spot price of an asset is $40 and the annual risk-free rate is 2%. Assume that the asset is not a dividend-paying stock and it does not incur any storage costs. What is the asset’s
How can the clearinghouse protect itself from sustained losses of either party on a futures contract?
Assume that H wishes to purchase one contract of corn from N, the seller of corn. He buys a contract (of 5,000 bushels), which trades on the first day of June at $3.68. The value of the contract is
The passage below is from the financial press.The Commodity Futures Trading Commission has recently (2010) voted to approve futures based on cinema box-office receipts. The reasoning behind their
Give an intuitive explanation of why spot and futures prices must be equal. What would be the implications if they are not?
How do institutional and retail investors take positions on indexes and/or on options on ETFs to hedge against adverse market movements?
Now you have read the article on International Focus, answer the two questions below. What are the uses of options in various markets and why? Why does volatility boost option exchanges?
You are given the following information on a stock: two possible stock prices at year end, S up= $100, S = $80; exercise price, $90; call option values, C = $10, C = $0. Compute down up down the
Based on the information below, compute the Black-Scholes-Merton formula (assume a no-dividend paying stock): S0= $70; X = $60; r = 0.025; T = 0.50 (half a year); σ = 0.60.What is the call
Given the following data, determine if the put-call parity holds and explain your result. Price,$60; strike price, $55; call price, $5; put price, $4; risk-free rate, 2.5%; period, 6 months
Assume that you purchased shares of ABC stock at $50 per share with the intention of selling them in 3 months. You consider applying the covered call writing strategy to hedge (somewhat) your
Assume that you want to profit from either movement of the market on a stock as long as the movement is high enough to cover your costs of entering these option contracts. Which strategy would you
Compare the profit/loss situations between going long on (i.e., owning) a stock and having a covered call strategy under the three market scenarios below.a. Stock price increases (call is exercised
Using the information in problem 3, compute the put-call parity equation for the IBMFA.X call and IBMRA.X put. Assume also that the current 3-month Treasury-bill rate is 0.25%.Explain your result.
Assume the following real information on IBM calls and puts as of May 29, 2009 (from Yahoo!-Finance). For example, the symbol IBMFA.X is the IBM 105.00 call for June 2009. The IBM price was $106.28,
Please read the passage below and answer the question below it.Google’s hopes the plan will “close the gap between the option value at grant and the employee’s perception of the value”,
Read the passage below and answer the two questions below it.Currently, a Google employee holding an option with a strike price of $450, compared with the market price of $500, can realize only the
Consider three bonds, X, Y and Z. Bond X has a yield of 8% and a maturity of 5 years; it can be held in one portfolio, called a bullet portfolio. Bonds Y and Z have 3 and 8 years to maturity and
Assume that you have invested 60% of your $30,000 into stocks and the rest into bonds. One year later you observe that stocks rose by 5% while bonds declined by 3%. How can you restore your original
Search the financial literature to find articles on bond market efficiency. Do they find that the bond market is efficient or not? Comment.
Explain what performance attribution analysis entails.
Assume that a portfolio manager has a 3-year investment horizon. Currently, a 10-year bond offers a 5% coupon rate and sells so it yields (to maturity) 4%. Assume that the portfolio manager predicts
You read in the financial press that some ETFs take the form of “core/satellite” investment management of a bond portfolio. For example, a “core” asset allocation, like an investmentgrade
Read the passage below from the financial press and answer the following question: what types of active bond portfolio strategies is the company employing and why?ABC Capital Management LLC considers
Explain the difference between enhanced indexing and active investment management.
Describe how you can manage interest rate risk with a ladders and barbells.
If portfolio managers expect interest rates to change, which active strategy would they employ in managing their portfolio? What if they expect the yield curve to pivot ( not shift)?
What are some of the factors that could change yields among bonds? If you expect a spread to be (abnormally) high, would you trade to take advantage of such a high spread? What are some of the
Explain the pros and cons of the buy-and-hold strategy. In other words, comment on the composition of securities and their characteristics in the portfolio, expenses, and interest-rate environment.
How does economic growth impact US Treasuries?
How are movements in the bond market that are widely watched on Wall Street ultimately felt on Main Street (the real economy)?
If the required liquidity premium for a short-term investor is 2%, what must be the expected short rate if the forward rate is 5%?
Consider a 7% coupon bond with five years to maturity trading currently at $100 and making annual payments. Find the bond’s prices for a 100 basis points increase and 100 basis points decrease in
What would entice you to invest in the longer-term end of the market if you are comfortable investing in the short-term end of the market? Which theories explain such movements?
Explain the actions that an issuer and/or a holder of a callable and/or putable bond would take if interest rates in the economy fell or rose enough for such actions to be taken profitably.
Describe how bond convexity impacts the price-yield relationship of a bond. What are some of the implications of bond convexity for an investor considering selecting among bonds?
Answer the questions below.a. Why do holders of mortgage-backed securities (MBS) suffer more when interest rates in the economy fall so as to trigger mortgage refinancing?b. Why do MBS lose more
Consult the financial press in today’s paper and record the 13-week and 26-week Treasury bill yields and prices. See if you can make some money by “riding the yield curve”.
Read the following statements, taken from financial newspapers, and answer the question(s)below each statement:A UK bond auction struggled to attract investors on Thursday amid further signs of
Assume a shift in the yield curve, steeper today than it was a couple of days ago. If a company issues new bonds today, would its bonds sell for higher or lower prices than if it had issued the bonds
Analysts suggest that a major economic expansion will favorably affect the prices of fixed-rate bonds, because the credit risk of bonds will decline as corporations realize better performance.Do you
Is the price of a long-term bond more or less sensitive to a change in interest rates than the price of a short-term security? If so, why?
Assume the following information for an existing zero-coupon bond: a par value of $10,000, maturity of three years, with a required rate of return of 12%. How much should investors be willing to pay
Assume a bond with the following data: a coupon rate of 8%, maturity of ten years, making semiannual payments.a. Calculate the value of the bond one year later, assuming market interest rates fall to
Assume a bond with the following data: a coupon rate of 6%, maturity of ten years, making semiannual payments.a. Calculate the value of the bond one year after the bond was issued, assuming market
If you applied a particular stock valuation model and its suggestion is to buy or sell the stock?Should you act accordingly?
Since BeyondMeat’s IPO in 2019, the meat industry disruptor’s trajectory can only be described as wild. Its all-time high towards the end of July 2019 was at $234.90, and now (November 27, 2019)
Assume the following hypothetical information on a stock:D 0= $1.00 g = 5% P 0= $45 P 1= $50 Compute the stock’s holding period return. If the stock is expected to yield 15%, would you buy or sell
You are given the following hypothetical information on a company:Total assets = $100,000,000 Total liabilities = $70,000,000 Total stockholder equity = $30,000,000 No. of shares outstanding = 10
If the intrinsic value of a stock exceeds the market price of the stock, is the stock over- or undervalued? Explain.
Use the information on the stock above to compute an estimate of its current price. Assume further that the stock’s expected dividend is $1.50 and the growth rate of dividends is 3.4%.
Assume that a stock has a beta coefficient of 1.2, the risk-free rate is 3% and the market risk premium is 7%. Answer the questions below.a. What is the stock’s expected and required rates of
Suppose that an investor is considering whether to keep a stock in his portfolio, buy more of it, or sell it. The investor requires a 10% rate of return from that stock. If the stock is expected to
If a stock’s dividend growth rate is expected to be zero forever, what would be the stock price if the dividend was $1.00 and the firm had a required rate of return of 10%?
Assume that the market yields 10% and the dividend yield of an average-risk stock is 5%, what would be the market’s consensus forecast for the rate of growth (appreciation) on that stock’s price?
An investor has the following information about a company: P 0 = $43, EPS = $3.00, k = 12%, and ROE = 29%a. Compute the company’s retention ratio ( rr)b. What would happen to the company’s P/E
Based on the information below on the Coca Cola Company (obtained from Value Line online), answer the following questions.Data for Coca-Cola:D = $1.36; D = $1.52; D = $1.64; P = $42.88; Average stock
Answer the following questions based on the following paragraph.“The time to buy stocks is when blood is running in the streets”, said one famous investor in the early nineteenth century. The
Based on the following paragraph, answer the questions that follow.I am upset that my favorite stock, which I owned for a very long time, has decreased in value. If its price continues to fall I am
What does fundamental analysis tell you about a stock? What type of investor should use this analysis?
If the prognosis for the economy is expansion, please answer the following questions:(a) What would be the impact on macroeconomic magnitudes?(b) What could be the situation regarding sectors
What is the impact of operating leverage on a company during the business cycle?
Can you identify some advantages and disadvantages of dual-class stocks?
If an industry is growing faster than the overall economy and the threat of new entrants is real, which stage of the life cycle is the industry in? Can you provide an example of such an industry?
How can you, the retail investor, apply active portfolio management and what practical issues could you face?
Search the Wall Street Journal to find articles on stock-split announcements and follow the path of the firm’s stock price. What do you see?
Scour the Wall Street Journal to find articles on the issue of foreign governments (such as China)holding US dollars and how this situation sparks heated debates on the US budget and trade deficits.
How is the CAPM related to the business cycle?
What is the relevance of monetary policy to investment management?
Explain the effect on the price level and output of an economy when there is an increase in investment within the economy.
Why should investors worry about federal budget deficits and trade deficits?
How can an investment practitioner use the information contained in the economic indicators?
Propose a policy for an overheating economy and a contracting economy. Include both economic policies in your discussion
Explain the link or the chain of events from a falling (value of the) dollar to business investment spending.
If a particular sector in the economy is expected to grow faster and generate higher cash flows than other sectors, what impact would that have on analysts’ perceptions about the sector and its
If an investment professional approached you and began telling you a story about how good(or hot) certain stocks were and would be, hoping to entice you to purchase them for your portfolio, that
Assume that you have estimated the following (market) model for a stock x:R = 0.05% + 1.1 R x m where R x and R m are the stock’s and market’s excess returns, respectively. If the market happens
What are the implications for technical analysis under the theory of behavioral finance?
Below are some actual reports on some companies’ quarterly results (as of January 25, 2011).Predict the subsequent change in each company’s stock price.a. Before the opening bell, DuPont reported

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