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essentials of investments

Questions and Answers of Essentials of Investments

What do you think would happen to the expected return on stocks if investors perceived higher volatility in the equity market? Relate your answer to Equation 6.7.
Which of the following choices best completes the following statement? Explain. An investor with a higher degree of risk aversion, compared to one with a lower degree, will most prefer investment
Consider these long-term investment data:• The price of a 10-year $100 par value zero-coupon inflation-indexed bond is $84.49.• A real-estate property is expected to yield 2% per quarter
Suppose that the inflation rate is expected to be 3% in the near future. Using the historical data provided in this chapter, what would be your predictions for:a. The T-bill rate?b. The expected rate
During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year.a. What was the real HPR on the bond over the year?b. Compare this real HPR to
Visit Professor Kenneth French’s data library website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and download the monthly returns of “6 portfolios formed on size
Using historical risk premiums from Table 5.4 over the 1926–2016 period as your guide, what would be your estimate of the expected annual HPR on the Big/Value portfolio if the current risk-free
The continuously compounded annual return on a stock is normally distributed with a mean of 20% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any
Determine the standard deviation of a random variable q with the following probability distribution:Value of q Probability 0 0.25 1 0.25 2 0.50
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with an 8%coupon if it is currently selling at par and the probability distribution of its yield to maturity a
Suppose your expectations regarding the stock price are as follows:State of the Market Probability Ending Price HPR (including dividends)Boom 0.35 $140 44.5%Normal growth 0.30 110 14.0 Recession 0.35
You are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD offering 1.5% per year plus the rate of
Use Figure 5.1 in the text to analyze the effect of the following on the level of real interest rates:a. Businesses become more pessimistic about future demand for their products and decide to reduce
Explain the difference between a call option and a long position in a futures contract. 1.A firm’s preferred stock often sells at yields below its bonds becausea. Preferred stock generally carries
Turn back to Table 2.7 and look at the IBM options. Suppose you buy a June 2016 expiration call option with exercise price $150.a. Suppose the stock price in June is $152. Will you exercise your
Look at the futures listings for the corn contract in Table 2.8. Suppose you buy one contract for March 2017 delivery. If the contract closes in March at a level of 4.06, what will your profit be?
Find the equivalent taxable yield of a short-term municipal bond currently offering yields of 4%for tax brackets of (a) zero, (b) 10%, (c) 20%, and (d) 30%.
Turn to Figure 2.8 and look at the listing for General Dynamics.a. How many shares could you buy for $5,000?b. What would be your annual dividend income from those shares?c. What must be General
Turn back to Figure 2.3 and look at the Treasury bond maturing in November 2041.a. How much would you have to pay to purchase one of these bonds?b. What is its coupon rate?c. What is the yield to
3. Bart Campbell, CFA, is a portfolio manager who has recently met with a prospective client, Jane Black. After conducting a survey market line (SML) performance analysis using the Dow Jones
2. Richard Roll, in an article on using the capital asset pricing model (CAPM) to evaluate portfolio performance, indicated that it may not be possible to evaluate portfolio management ability if
1. Identify and briefly discuss three criticisms of beta as used in the capital asset pricing model.
14. Suppose you own your own business, which now makes up about half your net worth. Based on what you have learned in this chapter, how would you structure your portfolio of financial assets?Year%
13. Can you identify a factor portfolio for the second factor?Year% Change in Factor Value Year% Change in Factor Value 1 9.84 7 3.52 2 6.46 8 8.43 3 16.12 9 8.23 4 16.51 10 7.06 5 17.82 11 15.74
12. Do the data suggest a two-factor economy?Year% Change in Factor Value Year% Change in Factor Value 1 9.84 7 3.52 2 6.46 8 8.43 3 16.12 9 8.23 4 16.51 10 7.06 5 17.82 11 15.74 6 13.31 12 2.03
11. Specify the hypothesis for a test of a second-pass regression for the two-factor SML.Year% Change in Factor Value Year% Change in Factor Value 1 9.84 7 3.52 2 6.46 8 8.43 3 16.12 9 8.23 4
10. Perform the first-pass regressions as did Chen, Roll, and Ross and tabulate the relevant summary statistics. (Hint: Use a multiple regression as in a standard spreadsheet package. Estimate the
9. Plot the capital market line (CML), the nine stocks, and the three portfolios on a graph of average returns versus standard deviation. Compare the mean-variance efficiency of the three portfolios
8. Explain Roll’s critique as it applies to the tests performed in Problems 3 to 7.Market Index Stock Excess Returns (%)A B C D E F G H I 1 29.65 33.88 25.20 36.48 42.89 39.89 39.67 74.57 40.22
7. Group the nine stocks into three portfolios, maximizing the dispersion of the betas of the three resultant portfolios. Repeat the test and explain any changes in the results.Market Index Stock
6. Summarize your test results and compare them to the results reported in the text.Market Index Stock Excess Returns (%)A B C D E F G H I 1 29.65 33.88 25.20 36.48 42.89 39.89 39.67 74.57 40.22
5. Perform the second-pass SML regression by regressing the average excess return of each portfolio on its beta.Market Index Stock Excess Returns (%)A B C D E F G H I 1 29.65 33.88 25.20 36.48 42.89
4. Specify the hypotheses for a test of the second-pass regression for the SML.Market Index Stock Excess Returns (%)A B C D E F G H I 1 29.65 33.88 25.20 36.48 42.89 39.89 39.67 74.57 40.22 90.19 2
3. Perform the first-pass regressions and tabulate the summary statistics.Market Index Stock Excess Returns (%)A B C D E F G H I 1 29.65 33.88 25.20 36.48 42.89 39.89 39.67 74.57 40.22 90.19 2
2. Search the Internet for a recent graph of market volatility. What does this history suggest about the history of consumption growth?
1. Suppose you find, as research indicates, that in the cross-section regression of the CCAPM, the coefficients of factor loadings on the Fama-French model are significant predictors of average
1. Find the monthly closing prices for the most recent 4 years for Abercrombie &Fitch (ANF) from the Excel Analytics section of Market Insight (www.mhhe.com/edumarketinsight). Also collect the
5. Claire Pierce comments on her life circumstances and investment outlook:I must support my parents who live overseas on Pogo Island. The Pogo Island economy has grown rapidly over the past 2 years
4. During an interview with her investment adviser, a retired investor made the following two statements:a. “I have been very pleased with the returns I’ve earned on Petrie stock over the past 2
3. Louise and Christopher Maclin live in London, United Kingdom, and currently rent an apartment in the metropolitan area. During an initial discussion of the Maclins’ financial plans, Christopher
2. Monty Frost’s tax-deferred retirement account is invested entirely in equity securities. Because the international portion of his portfolio has performed poorly in the past, he has reduced his
1. Don Sampson begins a meeting with his financial adviser by outlining his investment philosophy as shown below:Statement Number Statement 1 Investments should offer strong return potential but with
18. One seeming violation of the Law of One Price is the pervasive discrepancy of closed-end fund prices from their net asset values. Would you expect to observe greater discrepancies on diversified
17. Go to www.mhhe.com/bkm and link to the material for Chapter 12, where you will find 5 years of weekly returns for the S&P 500 and Fidelity’s Select Banking Fund (ticker FSRBX).a. Set up a
16. Go to www.mhhe.com/bkm and link to the material for Chapter 12, where you will find 5 years of weekly returns for the S&P 500.a. Set up a spreadsheet to calculate the 26-week moving average of
15. Given the following data, is the confidence index rising or falling? What might explain the pattern of yield changes?This Year Last Year Yield on top-rated corporate bonds 8% 8.5%Yield on
14. If the trading volume in advancing shares on day 1 in the previous problem was 330 million shares, while the volume in declining issues was 240 million shares, what was the trin statistic for
13. Table 12B contains data on market advances and declines. Calculate cumulative breadth and decide whether this technical signal is bullish or bearish.
12. Yesterday, the Dow Jones industrials gained 54 points. However, 1,704 issues declined in price while 1,367 advanced. Why might a technical analyst be concerned even though the market index rose
9. Suppose Baa-rated bonds currently yield 8%, while Aa-rated bonds yield 7%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What would
8. Collect data on the DJIA for a period covering a few months. Try to identify primary trends.Can you tell whether the market currently is in an upward or downward trend?
7. Calculate breadth for the NYSE using the data in Figure 12.7 . Is the signal bullish or bearish?
6. Use the data from The Wall Street Journal in Figure 12.7 to verify the trin ratio for the NYSE. Is the trin ratio bullish or bearish?
5. Some advocates of behavioral finance agree with efficient market advocates that indexing is the optimal investment strategy for most investors. But their reasons for this conclusion differ
4. Even if behavioral biases do not affect equilibrium asset prices, why might it still be important for investors to be aware of them?
3. What sorts of factors might limit the ability of rational investors to take advantage of any “pricing errors” that result from the actions of “behavioral investors”?
2. Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit the behavioral biases discussed in the chapter, security prices might still be set efficiently?
1. Explain how some of the behavioral biases discussed in the chapter might contribute to the success of technical trading rules.
3. Now form stock groups that use two criteria simultaneously. For example, form a portfolio of stocks that are both in the lowest quintile of price–earnings ratios and in the lowest quintile of
2. Use the price history from Market Insight (www.mhhe.com/edumarketinsight) to calculate the beta of each of the firms in the previous question. Use this beta, the T-bill rate, and the return on the
1. Collect the following data for a sample of firms from Market Insight (www.mhhe.com/edumarketinsight):a. Price/Book ratio.b. Price/EPS from operations ratio.c. Market capitalization (size).d.
10. Growth and value can be defined in several ways. “Growth” usually conveys the idea of a portfolio emphasizing or including only issues believed to possess above-average future rates of
9.a. Briefly explain the concept of the efficient market hypothesis (EMH) and each of its three forms—weak, semistrong, and strong—and briefly discuss the degree to which existing empirical
8. Your investment client asks for information concerning the benefits of active portfolio management.She is particularly interested in the question of whether active managers can be expected to
7. When technical analysts say a stock has good “relative strength,” they mean:a. The ratio of the price of the stock to a market or industry index has trended upward.b. The recent trading volume
6. Two basic assumptions of technical analysis are that security prices adjust:a. Gradually to new information, and study of the economic environment provides an indication of future market
5. A “random walk” occurs when:a. Stock price changes are random but predictable.b. Stock prices respond slowly to both new and old information.c. Future price changes are uncorrelated with past
4. According to the efficient market hypothesis:a. High-beta stocks are consistently overpriced.b. Low-beta stocks are consistently overpriced.c. Positive alphas on stocks will quickly disappear.d.
3. Which one of the following would provide evidence against the semistrong form of the efficient market theory?a. About 50% of pension funds outperform the market in any year.b. All investors have
2. Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:a. An abnormal price change at the
1. The semistrong form of the efficient market hypothesis asserts that stock prices:a. Fully reflect all historical price information.b. Fully reflect all publicly available information.c. Fully
22. Good News, Inc., just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon?
21. Suppose that during a certain week the Fed announces a new monetary growth policy, Congress surprisingly passes legislation restricting imports of foreign automobiles, and Ford comes out with a
20. You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you
19. We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not
18. Dollar-cost averaging means that you buy equal dollar amounts of a stock every period, for example, $500 per month. The strategy is based on the idea that when the stock price is low, your fixed
17. Investors expect the market rate of return in the coming year to be 12%. The T-bill rate is 4%.Changing Fortunes Industries’ stock has a beta of .5. The market value of its outstanding equity
16. In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA 3.1%. The rate of return on Bpex was
15. The monthly rate of return on T-bills is 1%. The market went up this month by 1.5%. In addition, AmbChaser, Inc., which has an equity beta of 2, surprisingly just won a lawsuit that awards it $1
14. An index model regression applied to past monthly returns in General Motors’ stock price produces the following estimates, which are believed to be stable over time:rGM .10%1.1rM If the
13. Which of the following phenomena would be either consistent with or a violation of the efficient market hypothesis? Explain briefly.a. Nearly half of all professionally managed mutual funds are
12. “If the business cycle is predictable, and a stock has a positive beta, the stock’s returns also must be predictable.” Respond.
11. Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?
10. Which of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient?a. Buy shares in companies with low P/E ratios.b. Buy shares in
9. Which of the following observations would provide evidence against the semistrong form of the efficient market theory? Explain.a. Mutual fund managers do not on average make superior returns.b.
8. Which of the following statements are true if the efficient market hypothesis holds?a. It implies that future events can be forecast with perfect accuracy.b. It implies that prices reflect all
7. Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market
6. Which of the following most appears to contradict the proposition that the stock market is weakly efficient? Explain.a. Over 25% of mutual funds outperform the market on average.b. Insiders earn
5. If prices are as likely to increase as decrease, why do investors earn positive returns from the market on average?
4. Steady Growth Industries has never missed a dividend payment in its 94-year history. Does this make it more attractive to you as a possible purchase for your stock portfolio?
3. “If all securities are fairly priced, all must offer equal expected rates of return.” Comment.
2. A successful firm like Microsoft has consistently generated large profits for years. Is this a violation of the EMH?
1. If markets are efficient, what should be the correlation coefficient between stock returns for two non-overlapping time periods?
8. In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and
7. The feature of arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the:a. Identification of anticipated changes in production, inflation, and term
6. An investor takes as large a position as possible when an equilibrium price relationship is violated.This is an example of:a. A dominance argument.b. The mean-variance efficient frontier.c.
5. The arbitrage pricing theory (APT) differs from the single-factor capital asset pricing model(CAPM) because the APT:a. Places more emphasis on market risk.b. Minimizes the importance of
4. According to the theory of arbitrage:a. High-beta stocks are consistently overpriced.b. Low-beta stocks are consistently overpriced.c. Positive alpha investment opportunities will quickly
3. A zero-investment portfolio with a positive alpha could arise if:a. The expected return of the portfolio equals zero.b. The capital market line is tangent to the opportunity set.c. The Law of One
2. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio Expected Return Beta X 16% 1.00 Y 12 0.25 In this situation you would conclude that portfolios X and

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