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business
essentials of investments

Questions and Answers of Essentials of Investments

Assume that you sell short 100 shares of AXZ company, which currently sells for $50 per share.a. What would be the maximum possible loss, theoretically speaking?b. What if you placed a stop-loss
Assume that you are given the following information on the company “Green Mountain”regarding the short sales of its stock:Shares shorted (000s): 9,184.5 Percent float: 49.4 Days to cover: 27
Assume that you wish to invest $200 in a security on a monthly basis and the current market price of the security is $15. Assume also that every month the price of the security changes by$2.00.
Assume that you expect the price of a stock to go down in the near future and you sell short 100 shares of that stock. The current market price of the share is $50.a. What is the maximum amount of
Assume that the price of a share of company N trades at $50. You have $5,000 to invest and borrow another $5,000 from your broker so that you invest $10,000 in the stock. The broker charges you an
Assume that you sold short at $50 and the current market price of the stock is $40. What type of order can you place at, say, $45, to protect you from the short sale?
Assume that you paid $50 for a share of company H, which is now trading at $60. If you wish to protect your investment against downside risk, what kind of order can you place with your broker when
If you begin your investment experience with a decision as to how much money to put in, say three asset classes, and then you proceed to choose among the available securities in each asset class,
Why do we say that the use of margin is a “double-edged sword”?
If you instruct your broker to buy 100 shares of Microsoft Corporation at the best current price available, what type of order are you placing?
Why do people buy stocks and bonds rather than just placing their money in safe bank accounts or in other safe cash instruments?
Although we stated in the text that the average investor is risk-averse, can you think of some investors who are risk-lovers or risk-neutral?
Which actions currently exist to suppress future episodes of unethical behavior?
What is the objective of the investment management process?
What are the social functions of financial intermediaries? Can you give some examples?
Which business has more or less financial and/or real assets, a bank or IBM? What is each business ’ s social function?
Classify the following assets as real or financial: factory, stock, option, pencil, knowledge, education.
How do you understand the term efficiency when applied to the financial markets?
Would you be willing to accept more risk if you expected to earn a higher return? If so, which attitude toward risk would you have?
We discussed social responsibility in the text. Can you advance an argument for the mandatory and for the nonvoluntary requirement of such behavior for firms by government law?
We discussed the conflicts that arise between existing and new stockholders when management wishes to undertake new projects financed by equity. Now, consider the following scenario. The management
Consider the following scenario. Suppose your parents ask their neighbor (who consistently pays attention to the stock market because he is an active investor) for advice on a particular stock. Your
We discussed the conflicts that arise between a company ’ s manager and its stakeholders. Can you suggest some other ways to align a manager ’ s goals to those of the firm ’ s owners? You might
Take a look at the cafeteria in your college campus. You and most of the other students go there on a daily basis for food and drinks. If the male person working there to serve you is always shirking
Why is it inappropriate to say “ I want to make as much money on my investments as possible ” ? What are you ignoring?
As a potential investor, what would be your objective(s) and constraints? What major trade-offs do you face?
Recognize the trends shaping the investment management industry and practice
Discuss how disruptive technologies impact investing
Describe some important alternative investment assets
Understand what credit derivatives are and their various types
Explain and use some important international parities and strategies
Explain some basic futures trading strategies
Comprehend the types and uses of financial futures
Recognize and use the relationship between spot and futures prices
Understand the functions, characteristics, and regulation of the futures markets
futures contract is and why it is used
Tell what
strategy
Employ stock index options as
Use the binomial and the Black-Scholes-Merton option valuation models
Describe some options trading strategies
put option
call and
Distinguish between
Explain how the options markets operate
Know about bond market efficiency and its impact on bond portfolio management
bond portfolio’s performance
Measure and evaluate
Distinguish among the various passive and active investment strategies
Know the pros and cons of the two main investment approaches, passive and active
Understand the bond investment management process and its steps
Understand some of the yield curve theories
Understand the yield curve and its significance
bond’s price sensitivity to changes in interest rates
Measure
bond
Price
Identify the various issuers and characteristics of bonds
bond is and describe its main features
Explain what
Understand the international bond market
Know how to apply some ad hoc investment strategies to picking stocks
Be aware of important issues in equity valuation
Use and interpret several relative equity valuation measures
stock using several methods
Value
stock’s expected and required rates of return and interpret them
Compute
Be aware of the importance of examining the industry in regard to forming various investment strategies
Use the business cycle to exploit profitable opportunities
Appreciate the significance of macroeconomic analysis
Understand what active and passive investment management strategies are
simple equity portfolio and conduct fundamental analysis
Construct
Read stock market quotations
Describe the two types of equity and the differences between them
Understand the implications of behavioral finance on investors, investment strategies, and investment management
Know what behavioral finance is and why it is gaining popularity
Define the anomalies of market efficiency and their implications for trading
Explain the impact of efficient markets on investment managers, investors, and asset pricing models
Understand the implications of efficient markets for investment strategies and analyses
Know what market efficiency is and its three forms
Compare the performance of risky portfolios
Use the CAPM and APT to make investment decisions
Derive and apply the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT)
Understand the capital market theory and its implications for pricing assets
riskless asset and the optimal risky portfolio
Optimally allocate funds between
Find the optimal risky portfolio
Understand how covariance and/or correlation affect portfolio risk
Understand modern portfolio theory
Learn the regulatory structures of major securities exchanges in the United States
foreign asset
Compute the return from investing in
Understand the impact of globalization of financial markets on financial markets
Learn the mechanics of securities trading on an exchange
Know the difference between an organized exchange and the over-the-counter securities market
Understand the fundamental functions of the global financial markets
See the connection between utility and risk aversion
Learn how to make economic (investment) decisions under risky environments

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