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essentials of investments

Questions and Answers of Essentials of Investments

17. Consider three stocks, X, Y, and Z, with the following closing prices on two particular dates:On date 1 there are 100 shares of stock X, 200 shares of stock Y, and 100 shares of stock
16. Assume that the market is composed of the following three securities:a. What is the aggregate value of the market?b. If security Cs price increases by 20%, what is the percentage change in the
7. Ginger Beaumont began the year with a portfolio valued at $10,000 and made a contribution to and a withdrawal from this portfolio over the next three months. Information regarding amounts and
1. Crungy Patrick owns a portfolio of three stocks. Crungy's holdings and the prices of the stocks at the end ofYear 1 and Year 2 are shown below. Assuming no contributions, withdrawals, or dividends
22. Colinos Associates is an investment management firm utilizing a very rigorous and disciplined asset al1ocation methodology as a key element of its investmen t approach. Twice a year, three or
8. Buzz Arlett, a portfolio manager for an investment management firm, has estimated the following risk-return characteristics for the stock and bond markets.The correlation between stocks and bonds
19. The duPont formula defines the net return on shareholders' equity as a function of the following components:• Operating margin • Assetturnover • Interest burden • Financialleverage •
18. (Appendix Question) Calculate the relative strength of Fort McCoy Packaging stock versus the S&P 500 over the ten-day period referred to in Problem 17, given the following closing prices for
17. (Appendix Question) The closing. high, and low prices for Fort McCoy Packaging stock over a ten-day interval are shown below. Construct a bar chart for Fort McCoy Packaging stock over this period
9. Augusta Ironworks reported the following fiscal year-end financial data (stated in OOOs).Given this information, calculate Augusta's:a. Price-earnings ratiob. Book value per sharec. Price-book
8. Last fiscal year, Afton Machinery had the following financial statement data:Calculate Afton's return on assets and return on equity. Sales/assets Net income/EBIT EBIT/sales Assets/equity 2.10 .65
12. Over the last three years, the Pluto Fund produced the following per share financial results. Calculate the annual returns on an investment in the Pluto Fund over this period. Year 1 Year 2 Year
1. The Neptune Value Fund has sold 150,000 shares to investors. Currently the fund has accrued investment management fee obligations of $50,000. The fund's portfolio is shown below. Calculate the
7. On November 18, three call options on Eden Prairie Associates stock, all expiring in December, sold for the following prices:Firpo Marberry is considering a "butterfly spread" that involves the
3. Consider the following stocks selling for the prices listed below:Specify the likely exercise prices that will be set for newly created options on these stocks. Stock Current Price A B $ 26 C 73
18. Oakdale Orchards has produced the following earnings over the last nine quarters:The expected earnings for the current quarter are based on the equation QE, = QE,-4 - .75( QE"I - Qf.,-r,).
17. Calculate the relationship between the following series of quarterly earnings using an autoregressive model of order one (use of a computer regression program is recommended). What is your
8. Rockton Plastics has made changes to its dividends over the last 14 years . On the basis ofa target payout ratio of 30%, according to the Lintner model, the firm would have preferred to make a
7. Hixton Farms has a target payout ratio of50%. Dividends paid last year amounted to $10 million. Its earnings were $20 million. Hixton's "speed of adjustment"factor for dividends is 60%. What will
1. Consider five annual cash flows (the first occurring one year from today):Given a discount rate of 10%, what is the present value of this stream ofcash flows? Year Cash Flow 1 $5 12 6 3 7 4 5 9
14. Shown here are ten quarters of return data for Baraboo Associates stock, as well as return data over the same period for a stock market index. Using this information, calculate the following
12. Tomah Electronics' stock price at the end of several quarters, along with the market index value for the same periods, is shown below. Tomah pays no dividends.Calculate the beta ofTomah's stock
13. Rank order the following bonds in terms of duration. Explain the rationale behind your rankings. (You do not have to actually calculate the bonds' durations.Logical reasoning will suffice.) Bond
12. Liz Funk owns a portfolio of four bonds with the following durations and proportions:What is the duration of Liz's bond portfolio? Bond Duration Proportion ARC 4.5 years .20 3.0 .25 3.5 .25 D 2.8
22. One common goal among fixed-income managers is to earn high incremental returns on corporate bonds versus government bonds of comparable durations.The approach of some corporate bond portfolio
21. [In 1990,] Barney Gray, CFA, is Director of'Fixed-Incorne Securities at Piedmont Security Advisors. In a recen t meeting, one of his major endowment clients suggested investing in corporate bonds
13. Given the following beginning and ending values for a particular price index and the respective number of years between the measurement of the two values, calculate the annual compounded
2. Given the following income tax schedule, draw a graph illustrating the marginal and average tax rates as a function of income level. Income $0-$10,000 Tax Rate 10% $10,001-$20,000 $20,001-$30,000
16. Dandelion Pfeffer owns a portfolio with the following characteristics:Assume that the returns are generated by a two-factor model. Dandelion decides to create an arbitrage portfolio by increasing
15. Assume that security returns are generated by a factor model in which two factors are pervasive. The sensitivities of two securities and of the riskfree asset to each of the two factors are shown
14. On the basis of a one-factor model, assume that the riskfree rate is 6% and the expected return on a portfolio with unit sensitivity to the factor is 8.5%. Consider a portfolio of two securities
7. Assume that security returns are generated by a one-factor model. Hap Morse holds a portfolio whose component securities have the following characteristics:Specify an arbitrage portfolio in which
6. Socks Seybold owns a portfolio with the following characteristics. (Assume that returns are generated by a one-factor model.)Socks decides to create an arbitrage portfolio by increasing the
5. Assuming a one-factor model of the form:r, = 4% + b;l'+ P.i consider three well-diversified portfolios (zero nonfactor risk) . The expected value of the factor is 8%.Is one of the portfolio's
4. Assuming a one-factor model, consider a portfolio composed of three securities with the following factor scnsivities:If the proportion of security I in the portfolio is increased by .2, how must
22. On the basis of a two-factor model, consider two securities with the following characteristics:The standard deviations of factor I and factor 2 are 20% and 15%, respectively, and the factors have
17. Dode Cicero owns a portfolio of two securities. On the basis of a two-factor model, the two securities have the following characteristics:The factors are uncorrelated, Factor 1 has an expected
15. On the basis of a three-factor model, consider a portfolio composed of three securities with the following characteristics:What are the sensitivities of the portfolio to factors 1, 2, and 3?
8. Recalculate the answers to Problem 7 assuming that the portfolio is also invested in a riskfree asset so that its investment proportions are: Security Riskfree Proportion .10 A .36 B .54
7. On the basis ofa one-factor model, consider a portfolio of two securities with the following characteristics:a. If the standard deviation of the factor is 15%, what is the factor risk of the
30. The following information describes the expected return and risk relationship for the stocks of two of WAH's competitors.Using only the data shown above:a. Draw and label a graph showing the
28. On the basis of the risk and return relationships of the CAPM, supply values for the seven missing numbers in the following table. Security ABCDE Expected Return Standard Beta Deviation % 0.8 %
23. You are given the following information on two securities, the market portfolio, and the riskfree rate:a. Draw the SML.b. What are the betas of the two securities?c. Plot the two securities on
20. Kitty Bransfield owns a portfolio composed of three securities. The betas of those securities and their proportions in Kitty'S portfolio are shown here. What is the beta of Kitty's portfolio?
19. The standard deviation of the market portfolio is 15%. Given the covariances with the market portfolio of the foBowing securities, calculate their betas. Security Covariance A 292 B 180 C 225
12. The market portfolio is assumed to be composed of four securities. Their covariances with the market portfolio and their proportions are shown below:Given these data, calculate the market
10. Assume that two securities constitute the market portfolio. Those securities have the following expected returns, standard deviations, and proportions:On the basis of this information, and given
14. Given the following expected return vector and variance-covariance matrix for three assets:and given the fact that Pie Traynor's risky portfolio is split 50-50 between the two risky assets:a.
17. Siggy Boskie owns a portfolio composed of three securities with the following characteristics:If the standard deviation of the market index is 18%, what is the total risk of Siggy's portfolio?
15. Lyndon Station stock has a beta of 1.20. Over five years, the following returns were produced by Lyndon stock and a market index. Assuming a market model intercept term of 0%, calculate the
11. The following table presen ts ten years of return data for the stock of Glenwood City Properties and for a market index. Plot the returns of Glenwood City and the market index on a graph. with
7. Dode Brinker owns a portfolio of two securities with the following expected returns, standard deviations, and weights:What correlation between the two securities produces the maximum portfolio
28. (Appendix Question) Given the followingjoint probability distribution of returns for Securities A and n, calculate the covariance between the two securities. State Security A Security B
27. (Appendix Question) Bear Tracks Schmitz has estimated the following probability distribution of next year's dividend payments for Mauston Inc.'s stock. According to Bear Tracks, what is the
26. (Appendix Question) Calculate the expected return, mode, and median for a stock having the following probability distribution: Probability of Occurrence Return -40% .03 -10 .07 0 .30 +15 .10 +30
25. Listed here are estimates of the standard deviations and correlation coefficients for three stocks.a. If a portfolio is composed of 20% of stock A and 80% of stock C, what is the portfolio's
21. Rube Bressler owns three stocks and has estimated the following joint probability distribution of returns:Calculate the portfolio's expected return and standard deviation if Rube invests 20% in
20. Given the following variance-covariance matrix for three securities, as well as the percentage of the portfolio for each security, calculate the portfolio's standard deviation. Security A
18. Gibby Brock has estimated the followingjoint probability distribution of returns for investments in the stock of Lakeland Halfway Homes and Afton Brewery:On the basis of Gibby's estimates,
15. The expected returns and standard deviations of stocks A and Bare:Mox McQuery buys $20,000 of stock A and sells short $10 ,000 of stock B, using all of the proceeds to buy more of stock A. The
13. Given the following information about four stocks comprising a portfolio, calculate each stock's expected return . Then, using these individual securities' expected returns, calculate the
12. At the beginning of the year, Corns Bradley owned four securities in the following amounts and with the following current and expected end-of-year prices:What is the expected return on Corns's
10. Consider four stocks with the following expected returns and standard deviations.Are any of these stocks preferred over another by a risk-averse investor? Expected Standard Stock Return Deviation
9. Consider the following two sets of indifference curves for investors Hack Wilson and Kiki Cuyler. Determine whether Hack or Kiki:a. Is more risk-averseb. Prefers investment A to investment Bc.
2. Listed below are a number of portfolios and expected returns, standard deviations, and the amount ofsatisfaction (measured in utils) these portfolios provide Arky Vaughn. Given this information,
31.a. Calculate the two-year spot rate implied by the U.S. Treasury yield curve data given below. Assume that interest is paid annually for purposes of this calculation.Show all calculations.b.
30. The following are the average yields on U.S. Treasury bonds at two points in time.a. Assuming a pure expectations hypothesis, define a forward rate. Describe how you would calculate the forward
8. Bosco Snover is the NYSE specialist in Eola Enterprises' stock. Bosco's limit order book for Eola appears as follows:The last trade in the stock took place at $30.a. If a market order to sell 200
10. The following table shows the annual returns on a portfolio of small stocks during the 20-year period from 1976 to 1995. What are the average return and standard deviation of this portfolio? How
11. Use again the data in Table 12A to compute a 5-day moving average for Computers, Inc. Can you identify any buy or sell signals? Trading Computers, Industry Trading Computers, Industry Day Inc.
10. Table 12A presents price data for Computers, Inc., and a computer industry index. Does Computers, Inc., show relative strength over this period? Trading Computers, Industry Trading Computers,
23. Examine the accompanying figure,57 which presents cumulative abnormal returns both before and after dates on which insiders buy or sell shares in their firms. How do you interpret this figure?
9. The SML relationship states that the expected risk premium on a security in a one-factor model must be directly proportional to the security’s beta. Suppose that this were not the case. For
7. Consider the following two regression lines for stocks A and B in the following figure.a. Which stock has higher firm-specific risk?b. Which stock has greater systematic (market) risk?c. Which
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
The index value in each week is then updated by multiplying the previous week’s level by (1 1 rate of return over previous week).b. Identify every instance in which the index crosses through its
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 the
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
Use again the data in Table 12A to compute a 5-day moving average for Computers, Inc. Can you identify any buy or sell signals?
Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What would happen
Calculate breadth for the NYSE using the data in Figure 12.7 . Is the signal bullish or bearish?
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?
How might the P/E effect (discussed in the previous chapter) also be explained as a consequence of regret avoidance?
saw in the last chapter that stocks seem to exhibit a pattern of short- to middle-term momentum, along with long-term reversals. How might this pattern arise from an interplay between the
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 betas
Explain Roll’s critique as it applies to the tests performed in Problems 1–5.
29. (Appendix Question) Using the data given in Tables 6.3 and 6.4, calculate the correlation coefficient between the returns on Alpha and Omega stock.
24. Consider two securities, A and B, with expected returns of 15% and 20%, respectively, and standard deviations of 30% and 40%, respectively. Calculate the standard deviation of a portfolio
23. When is the standard deviation of a portfolio equal to the weighted average of the standard deviation of the component securities? Show this mathematically for a two-security portfolio. (Hint:
22. If a portfolio's expected return is equal to the weighted average of the expected returns of the component securities, why is a portfolio's risk not generally equal to the weighted average ofthe
19. Calculate the correlation matrix that corresponds to the variance-covariance matrix given in the text [or Able, Baker, and Charlie.
17. Give an example of two common stocks that you would expect to exhibit a relatively low correlation. Then give an example of two that would have a relatively high correlation.
16. Both the covariance and the correlation coefficient measure the extent to which the returns on securities move together.What is the relationship between the two statistical measures? Why is the
14. Squeaky Bluege has been considering an investment in Oakdale Merchandising.Squeaky has estimated the following probability distribution of returns for Oakdale stock:Return -10%o 10 20 30
11. Do you agree with the assumptions of nonsatiation and risk aversion? Make a case for or against these assumptions.
8. Why are the indifference curves of more risk-averse investors more steeply sloped than those of investors with less risk aversion?
7. Explain why an investor's indifference curves cannot intersect.
6. What is meant by the statement that "risk-averse investors exhibit diminishing marginal utility of income"? Why does diminishing marginal utility cause an investor to refuse to accept a "fair bet"?
5. Why are typical investors assumed to prefer portfolios on indifference curves lying to the northwest?
4. What does a set of convex indifference curves imply about an investor's tradeoff between risk and return as the amount of risk varies?

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