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essentials of investments

Questions and Answers of Essentials of Investments

In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 6%.Assume the stocks on which
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity relationship as well as a numerical
The board of a large pension fund noticed that the alpha value of the portfolio of one of its contract managers has recently increased. Should the fund increase the allocation to this portfolio? LO.1
A put option on a stock with a current price of $33 has an exercise price of $35. The price of the corresponding call option is $2.25. According to put-call parity, if the effective annual risk-free
A call option with a strike price of $50 on a stock selling at $55 costs $6.50. What are the call option’s intrinsic and time values? LO.1
What would be the percentage increase or decrease in the stock price required to break even? LO.1
Could portfolio A show a higher Sharpe ratio than that of B and at the same time a lower M2 measure? Explain. LO.1
What would be the cost of a straddle using the later expiration date? At expiration, what would be the break-even stock prices for the straddle? LO.1
What are the prices for the put and call with a later expiration date? LO.1
Two portfolio managers use different procedures to estimate alpha. One uses a singleindex model regression, the other the Fama-French model. Other things equal, would you prefer the portfolio with
What would be the percentage increase or decrease in the stock price required to break even? LO.1
At expiration, what would be the break-even stock prices for the straddle? LO.1
What would be the cost of a straddle using these options? LO.1
What are the prices for the put and call with the nearest expiration date? LO.1
Select 10 firms that interest you from the Market Insight population. For each firm, open the Stock Report. From the first page of the report, note the stock’s current price, target price, and the
On the Market Insight Company page, enter stock symbol GE for General Electric. Go to the S&P Stock Reports section for GE.a. Scroll down to Key Stock Statistics and locate the 52-week range for
Rich McDonald, CFA, is evaluating his investment alternatives in Ytel Incorporated by analyzing a Ytel convertible bond and Ytel common equity. Characteristics of the two securities a re gi ven in
Evaluate the timing and selection abilities of the four managers whose performances are plotted in the following four scatter diagrams.(C)rP – rf rM – rf(A)rP – rf rM – rf(D)rP – rf rM –
Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the put and call will be
The agricultural price support system guarantees farmers a minimum price for their output.Describe the program provisions as an option. What is the asset? The exercise price? LO.1
Consider the following information regarding the performance of a money manager in a recent month. The table presents the actual return of each sector of the manager’s portfolio in column (1), the
Conventional wisdom says one should measure a manager’s investment performance over an entire market cycle. What arguments support this contention? What arguments contradict it? LO.1
Donna Donie, CFA, has a client who believes the common stock price of TRT Materials(currently $58 per share) could move substantially in either direction in reaction to an expected court decision
During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%. Evaluate the manager based on the portfolio alpha. LO.1
Which one of the following statements about the value of a call option at expiration is false?a. A short position in a call option will result in a loss if the stock price exceeds the exercise pric
Go to www.mhhe.com/bkm and link to the material for Chapter 18, where you will find five years of monthly returns for two mutual funds, Vanguard’s U.S. Growth Fund and U.S.Value Fund, as well as
Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the put and call will be
The agricultural price support system guarantees farmers a minimum price for their output.Describe the program provisions as an option. What is the asset? The exercise price? LO.1
Joe Finance has just purchased a stock index fund, currently selling at $1,200 per share.To protect against losses, Joe plans to purchase an at-the-money European put option on the fund for $60, with
You buy a share of stock, write a one-year call option with X $10, and buy a one-year put option with X $10. Your net outlay to establish the entire portfolio is $9.50. What must be the risk-free
A put option with strike price $60 trading on the Acme options exchange sells for $2. To your amazement, a put on the firm with the same expiration selling on the Apex options exchange but with
Consider the following portfolio. You write a put option with exercise price $90 and buy a put with the same expiration date with exercise price $95.a. Plot the value of the portfolio at the
Consider the following options portfolio. You write a July 2009 expiration call option on IBM with exercise price $100. You also write a July expiration IBM put option with exercise price $95.a.
A fund manager scrutinizing the record of two market timers comes up with this information:a. What are the conditional probabilities, P 1 and P 2 , and the total ability parameters for timers A and
In what ways is owning a corporate bond similar to writing a put option? A call option? LO.1
Use the spreadsheet from the Excel Application boxes on spreads and straddles (available at www.mhhe.com/bkm; link to Chapter 15 material) to answer these questions.a. Plot the payoff and profit
You are attempting to formulate an investment strategy. On the one hand, you think there is great upward potential in the stock market and would like to participate in the upward move if it
A bearish spread is the purchase of a call with exercise price X 2 and the sale of a call with exercise price X 1 , with X 2 greater than X 1 . Graph the payoff to this strategy and compare it to
The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price
The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months.
Suppose you think Wal-Mart stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S 0 , is $100, and the call option expiring in one year has an
Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares, but would prefer to put off the sale until next year due to tax reasons. If
The following diagram shows the value of a put option at expiration:4 04 76 80 Stock price ($)Option value Short put Long put Exercise price of both options Ignoring transaction costs, which of the
You establish a straddle on Intel using September call and put options with a strike price of $50. The call premium is $4.25 and the put premium is $5.00.a. What is the most you can lose on this
An investor buys a call at a price of $4.50 with an exercise price of $40. At what stock price will the investor break even on the purchase of the call? LO.1
You purchase one IBM March 100 put contract for a premium of $6.47. what is your maximum possible profit? (See Figure 15.1.) LO.1
The chairman provides you with the following data, covering one year, concerning the portfolios of two of the fund’s equity managers (manager A and manager B ). A lthough the portfolios consist
Turn back to Figure 15.1 , which lists the prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following July expiration
The following price quotations are for exchange-listed options on Primo Corporation common stock.Company Strike Expiration Call Put Primo 61.12 55 Feb 7.25 .48 With transaction costs ignored, how
Why do you think the most actively traded options tend to be the ones that are near the money? LO.1
We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each. LO.1
If you want to add one of the stocks to your portfolio, which one would you choose? LO.1
Carl Karl, a portfolio manager for the Alpine Trust Company, has been responsible since 2015 for the City of Alpine’s Employee Retirement Plan, a municipal pension fund.Alpine is a growing
Click on the Research Wizard on the left-side menu and select the Comparison submenu to compare Kraft and Sara Lee.What items do you see that have not been previously considered but might be
Record the receivables turnover, inventory turnover, and total asset turnover ratios for the firms and for the industry. How efficiently are the managers using these assets? LO.1
Look at the firms’ return on equity ratios, both the ones for the current year and the five-year averages. Compare them to each other and to the industry average to see how the firm’s investments
Plot the firms’ and the industry’s current and quick ratios on a third chart. Analyze the firms’ liquidity status. LO.1
Plot the net profit margins for both firms and the industry on another column chart. How do the firms’ profit margins compare to each other and to the industry average? LO.1
Plot the following ratios for both firms and the industry on one column chart: five-year annual average sales growth rate, five-year annual average net income growth rate. Which firm is growing
Enter the Market Insight database and link to Company, then Population. Select a company of interest to you and link to its Annual Cash Flow Statement in the Excel Analytics section. Answer the
Select the Industry tab and choose the Home Furnishing industry. In the Compustat Reports section, click on the link to get a list of the subindustry constituents. Pick two companies from the list
Use Market Insight to find information about Vulcan Materials Company (VMC), Southwest Airlines (LUV), Honda Motor Company (HMC), Nordstrom, Inc. (JWN), and Abbott Laboratories (ABT). Use the Excel
The DuPont formula defines the net return on shareholders’ equity as a function of the following components:Operating margin Asset turnover••www.mhhe.com/bkm 14 Financial Statement Analysis 469
Scott Kelly is reviewing MasterToy’s financial statements in order to estimate its sustainable growth rate. Using the information presented in Table 14.19a. Identify and calculate the components of
A portfolio manager summarizes the input from the macro and micro forecasts in the following ta ble:MICRO FORECASTS Asset Expected Return (%) Beta Residual Standard Deviation (%)Stock A 20 1.3 58
Janet Ludlow is a recently hired analyst. After describing the electric toothbrush industry, her first report focuses on two companies, QuickBrush Company and SmileWhite Corporation, and
The financial statements for Chicago Refrigerator Inc. (see Tables 14.5 and 14.6) are to be used to compute the ratios a through h for 2009.a. Quick ratio.b. Return on assets.c. Return on common
The cash flow data of Palomba Pizza Stores for the year ended December 31, 2009, are as follows:Cash payment of dividends $ 35,000 Purchase of land 14,000 Cash payments for interest 10,000 Cash
The information in the following table comes from the 2007 financial statements of QuickBrush Company and SmileWhite Corporation:•••••••••www.mhhe.com/bkm 14 Financial Statement
What is the fund’s standard deviation? LO.1
Jones Group has been generating stable after-tax return on equity (ROE) despite declining operating income. Explain how it might be able to maintain its stable aftertax ROE. LO.1
What is the fund’s Sharpe ratio? LO.1
What is the standard index? What is the best-fit index? LO.1
A firm has a tax burden ratio of .75, a leverage ratio of 1.25, an interest burden of .6, and a return on sales of 10%. The firm generates $2.40 in sales per dollar of assets. What is the firm’s
What are the beta and alpha coefficients using both the standard index and the best-fit index? How do these compare to the fund’s parameters? LO.1
A firm has an ROE of 3%, a debt/equity ratio of .5, a tax rate of 35%, and pays an interest rate of 6% on its debt. What is its operating ROA? LO.1
Use the DuPont system and the following data to find return on equity.Leverage ratio 2.2 Total asset turnover 2.0 Net profi t margin 5.5%Dividend payout ratio 31.8%What is the company’s return on
Due to currency risk, dollar-denominated returns of international portfolios will have a higher standard deviation than local currency–denominated returns. LO.1
Cash flow from operating activities includes:a. Inventory increases resulting from acquisitions.b. Inventory changes due to changing exchange rates.c. Interest paid to bondholders.d. Dividends paid
The principle of diversification assures us that diversifying a U.S. portfolio internationally will reduce standard deviation. LO.1
A company’s current ratio is 2.0. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio? What about the asset turnover
For a passive investor, the minimum-variance portfolio of country indexes is optimal. LO.1
A currency-hedged foreign-stock portfolio return is the weighted average of the foreign stock returns in local currency.PROBLEM SETS www.mhhe.com/bkm 646 Part SIX Active Investment Management
The ABC Corporation has a profit margin on sales below the industry average, yet its ROA is above the industry average. What does this imply about its asset turnover? LO.1
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£.a. How many shares can the
Use the following financial statements of Heifer Sports Inc in Table 14.14 to find Heifer’sa. Inventory turnover ratio in 2009.b. Debtequity ratio in 2009.c. Cash fl ow from operating activities in
What is your best judgment about the stock’s current status—do you think it is selling at an appropriate price? LO.1
Compare the expected HPR you calculated in Part 1 to the required CAPM return you calculated in Part LO.1
Calculate the required return based on the Capital Asset Pricing Model (CAPM).a. Use a risk-free rate from moneycentral.msn.com/investor/market/treasuries.aspx.b. Use the beta coefficient shown in
If each of the nine outcomes in Problem 5 is equally likely, find the standard deviation of both the pound- and dollar-denominated rates of return. LO.1
First calculate the expected holding-period return (HPR) on Target Corporation’s stock based on its current price, its expected price, and its expected dividend.a. Go to
On the Market Insight home page, click on the Industry tab and select the Restaurants category. In the Compustat Reports section, click on the Constituents link to get a list of companies in this
Use the data from Market Insight to estimate the intrinsic values of three firms from your sample. Use the firms’ betas from the S&P Stock Report section. Make reasonable judgments about the market
Click on the Market Insight Company tab, then the Population tab, and scroll through the list to fi nd 10 fi rms that interest you. Click on a fi rm’s name and its symbol will automatically be
Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant-dividendgrowth price/earnings (P/E) ratio model. Johnson assumes that Sundanci’s earnings and dividends will grow at
To continue with Sundanci, Abbey Naylor, CFA, has been directed to determine the value of Sundanci’s stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that Sundanci’s FCFE
Helen Morgan, CFA, has been asked to use the DDM to determine the value of Sundanci, Inc. Morgan anticipates that Sundanci’s earnings and dividends will grow at 32%for two years and 13%
Calculate the contribution to total performance from currency, country, and stock selection for the manager in the following table. All exchange rates are expressed as units of foreign c urrency tha
Shaar (from the previous problem) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying trend) EPS, which is adjusted for temporary impacts on
While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either free cash flow to the firm (FCFF) or free cash flow to equity (FCFE) in her

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