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fundamentals investments valuation

Questions and Answers of Fundamentals Investments Valuation

16. Using Options Quotations (LO4, CFA4) In Problem 14, suppose Target stock sells for $53 per share immediately before your options’ expiration. What is the rate of return on your investment?What
15. Options Quotations (LO4, CFA4) Which put contract sells for the lowest price? Which one sells for the highest price? Explain why these respective options trade at such extreme prices. Calls for
14. Options Quotations (LO4, CFA4) If you wanted to purchase the right to sell 2,000 shares of Target stock in March 2019 at a strike price of $55 per share, how much would this cost you? Calls for
Margin Purchases Suppose you have a margin account with TD Ameritrade. You purchase 1,000 shares of IBM stock on 50 percent margin at today’s price. Go to finance.yahoo.com to find your purchase
Broker Call Money Rate What is the current broker call money rate? To find out, go to bankrate.com and look up the call money rate.
Short Interest You can find the number of short sales on a particular stock at finance.yahoo.com. Go to the site and find the number of shares short sold for ExxonMobil (XOM) under
Risk Tolerance As we discussed in the chapter, risk tolerance is based on an individual’s personality and investment goals. There are numerous risk tolerance questionnaires on the web. One,
Based on the information in the case, which one of the following portfolios should the Analees choose?Expected Return Allocation Portfolio A Portfolio B Portfolio C U.S. large stocks 9% 20% 5%
What is the difference between strategic and tactical asset allocation?
Why could two investors of the same age wind up with different investment portfolios?
Besides risk tolerance, what are some other constraints, strategies, and policies that investors use in forming an investment portfolio?
What is the maximum possible loss on a short sale? Explain.
Why might an investor choose to short a stock?
In our previous example (Example 2.6), at what price per share would you be subject to a margin call?
What is a margin call?
What is the effect of a margin purchase on gains and losses?
What is the difference between a cash and a margin account?
In our previous example (Example 2.3), suppose the maintenance margin was 40 percent.At what price per share would you have been subject to a margin call?
You want to buy 1,000 shares of Devon Energy (DVN) at a price of $24 per share. You put up $18,000 and borrow the rest. What does your account balance sheet look like?What is your margin?
What is the SIPC? How does SIPC coverage differ from FDIC coverage?
What are the differences between full-service and deep-discount brokers?
What is asset allocation?
What are some of the constraints investors face in making investment decisions?
What does the term “risk-averse” mean?
Average Return and Standard Deviation Go to finance.yahoo.com and enter the ticker symbol for your favorite stock. Now look for the historical prices and find the monthly closing stock price for the
Ticker Symbols Go to finance.yahoo.com and look up the ticker symbols for the following companies: 3M Company, International Business Machines, Dell Computer, Advanced Micro Devices, American
What is Vega’s geometric average return over the five-year period?a. 7.85 percentb. 9.00 percentc. 15.14 percent
28. Portfolio Margin (LO3, CFA4) Assume that you have identified three different stocks that you would like to purchase. You decide to buy 100 shares of each stock. Stock A is priced at $30;Stock B
27. Short Sales (LO4, CFA5) You believe that Thorn Enterprises stock is going to fall, so you have decided to short sell 1,000 shares at a price of $32. Assuming the initial margin requirement is 50
26. Short Sales (LO4, CFA5) You believe the stock in Freeze Frame Co. is going to fall, so you short 600 shares at a price of $72. The initial margin is 50 percent. Construct the equity balance sheet
25. Calculating Short Sale Returns (LO4, CFA5) You just sold short 750 shares of Wetscope, Inc., a fledgling software firm, at $96 per share. You cover your short when the price hits $86.50 per share
24. Short Sales (LO4, CFA5) Repeat Problem 23 assuming you short the 800 shares on 60 percent margin.
23. Short Sales (LO4, CFA5) You believe that Rose, Inc., stock is going to fall and you’ve decided to sell 800 shares short. If the current share price is $47, construct the equity account balance
22. Calculating Returns (CFA1) Looking back at Problem 12, suppose the call money rate is 5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for six
21. Annualized Returns (CFA1) Suppose you buy stock at a price of $57 per share. Five months later, you sell it for $61. You also received a dividend of $.60 per share. What is your annualized return
20. Annualized Returns (CFA1) In Problem 19, suppose your holding period was five months instead of seven. What is your annualized return? What do you conclude in general about the length of your
19. Annualized Returns (CFA1) Suppose you hold a particular investment for seven months. You calculate that your holding period return is 14 percent. What is your annualized return?
18. Margin Interest (LO3, CFA4) Suppose you take out a margin loan for $75,000. You pay a 6.4 percent effective rate. If you repay the loan in two months, how much interest will you pay?
17. Margin Interest (LO3, CFA4) Suppose you take out a margin loan for $50,000. The rate you pay is an 8.4 percent effective rate. If you repay the loan in six months, how much interest will you pay?
16. Margin and Leverage (LO3, CFA4) Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 800 shares of stock at $34 per share. You put up$15,000. One
15. Margin and Leverage (LO3, CFA4) Suppose the call money rate is 5.6 percent, and you pay a spread of 1.2 percent over that. You buy 1,000 shares at $40 per share with an initial margin of 50
14. Margin and Leverage (LO3, CFA4) In Problem 13, suppose the call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Calculate your return on investment for each of
13. Margin Call (LO3, CFA4) Suppose you purchase 500 shares of stock at $48 per share with an initial cash investment of $8,000. If your broker requires a 30 percent maintenance margin, at what share
12. Calculating Margin (LO3, CFA4) You’ve just opened a margin account with $20,000 at your local brokerage firm. You instruct your broker to purchase 500 shares of Landon Golf stock, which
11. Calculating Margin (LO3, CFA4) Using the information in Problem 1, construct your equity account balance sheet at the time of your purchase. What does your balance sheet look like if the share
10. Taxes and Returns (LO1, CFA9) You purchased a stock at the end of last year at a price of $73.At the end of this year, the stock pays a dividend of $1.20 and you sell the stock for $78. What is
9. Margin Calls on Short Sales (LO4, CFA5) You sold short 1,000 shares of stock at a price of$36 and an initial margin of 55 percent. If the maintenance margin is 35 percent, at what share price will
8. Margin Calls on Short Sales (LO4, CFA5) The stock of Flop Industries is trading at $48. You feel the stock price will decline, so you short 1,000 shares at an initial margin of 60 percent. If the
7. Margin Calls (LO3, CFA5) You decide to buy 1,200 shares of stock at a price of $34 and an initial margin of 55 percent. What is the maximum percentage decline in the stock before you will receive
6. Margin Calls (LO3, CFA4) You buy 500 shares of stock at a price of $38 and an initial margin of 60 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?
5. Margin Purchases (LO3, CFA4) You have $22,000 and decide to invest on margin. If the initial margin requirement is 55 percent, what is the maximum dollar purchase you can make?
4. Margin (LO3, CFA4) Repeat Problems 2 and 3 assuming the initial margin requirement is 70 percent.Does this suggest a relationship between the initial margin and returns?
3. Margin Return (LO3, CFA4) In Problem 2, suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin?What if the
2. Margin (LO3, CFA4) You purchase 275 shares of 2nd Chance Co. stock on margin at a price of$53. Your broker requires you to deposit $8,000. What is your margin loan amount? What is the initial
1. Calculating Margin (LO3, CFA4) Carson Corporation stock sells for $17 per share, and you’ve decided to purchase as many shares as you possibly can. You have $31,000 available to invest.What is
10. Taxes (LO4, CFA9) How will personal tax rates impact the choice of a traditional IRA versus a Roth IRA?
9. Liquidity (LO4, CFA5) The liquidity of an asset directly affects the risk of buying or selling that asset during adverse market conditions. Describe the liquidity risk you face with a short stock
8. Long vs. Short Profits (LO4, CFA5) An important difference between a long position in stock and a short position concerns the potential gains and losses. Suppose a stock sells for $18 per share
7. Broker-Customer Relations (LO2, CFA11) Suppose your broker tips you on a hot stock. You invest heavily, but, to your considerable dismay, the stock plummets in value. What recourse do you have
6. Brokers versus Advisors (LO2, CFA11) To an investor, what is the difference between using an advisor and using a broker?
5. Allocation versus Timing (LO1, CFA10) Are market timing and tactical asset allocation similar?Why or why not?
4. Allocation versus Selection (LO1, CFA2) What is the difference between asset allocation and security selection?
3. Margin Requirements (LO3, CFA4) What is the reason margin requirements exist?
2. Short Sales (LO4, CFA5) What does it mean to sell a security short? Why might you do it?
1. Margin (LO3, CFA4) What does it mean to purchase a security on margin? Why might you do it?
15. Investment Constraints (LO1, CFA5) Which of the following investment constraints is expected to have the most fundamental impact on the investment decision process for a typical investor?a.
14. Investment Decisions (LO1, CFA2) Which of the following investment strategies or tactics is likely the most relevant in the decision to short sell a particular stock?a. Market timingb. Asset
13. Investment Decisions (LO1, CFA8) Which of the following investment strategies or tactics will likely consume the greatest amount of resources, time, effort, and so on, when implementing an active
12. Investment Decisions (LO1, CFA2) Which of the following investment factors, strategies, or tactics is most associated with an active investment policy?a. Market timingb. Asset allocationc.
11. Investment Decisions (LO1, CFA7) Which of the following investment factors, strategies, or tactics is the least relevant to a passive investment policy?a. Market timingb. Asset allocationc.
10. Margin Calls (LO4, CFA5) You deposit $100,000 cash in a brokerage account and short sell$200,000 of stocks. Your broker requires a maintenance margin of 30 percent. Which of the following is the
9. Margin Calls (LO3, CFA4) You deposit $100,000 cash in a brokerage account and purchase$200,000 of stocks on margin by borrowing $100,000 from your broker, who requires a maintenance margin of 30
8. Account Margin (LO4, CFA5) You deposit $100,000 cash in a brokerage account and short sell$200,000 of stocks on margin. Later, the value of the stocks held short rises to $250,000. What is your
7. Account Margin (LO4, CFA5) You deposit $100,000 cash in a brokerage account and short sell$200,000 of stocks on margin. Later, the value of the stocks held short rises to $225,000. What is your
6. Account Margin (LO3, CFA4) You deposit $100,000 cash in a brokerage account and purchase$200,000 of stocks on margin by borrowing $100,000 from your broker. Later, the value of your stock holdings
5. Account Margin (LO3, CFA4) You deposit $100,000 cash in a brokerage account and purchase$200,000 of stocks on margin by borrowing $100,000 from your broker. Later, the value of your stock holdings
4. Leverage (LO4, CFA5) You deposit $100,000 cash in a brokerage account and short sell$200,000 of stocks. Later, the value of the stocks held short rises to $250,000, whereupon you get nervous and
3. Leverage (LO3, CFA4) You deposit $100,000 cash in a brokerage account and purchase$200,000 of stocks on margin by borrowing $100,000 from your broker. Later, the value of your stock holdings falls
2. Asset Allocation (LO1, CFA2) Which of the following best reflects the importance of the asset allocation decision to the investment process? The asset allocation decision:a. Helps the investor
1. Investment Objectives (LO1, CFA8) An individual investor’s investment objectives should be expressed in terms of:a. Risk and return.b. Capital market expectations.c. Liquidity needs and time
3. Margin Calls (LO3, CFA4) You purchased 500 shares of stock at a price of $56 per share on 50 percent margin. If the maintenance margin is 30 percent, what is the critical stock price?
2. Short Sales (LO4, CFA5) Suppose that in the previous problem you shorted 10,000 shares instead of buying. The initial margin is 60 percent. What does the account balance sheet look like following
1. The Account Balance Sheet (LO2, CFA4) Suppose you want to buy 10,000 shares of American Airlines (AAL) at a price of $30 per share. You put up $200,000 and borrow the rest. What does your account
22. Dollar-Weighted Average Return (LO3, CFA6) Suppose that an investor opens an account by investing $1,000. At the beginning of each of the next four years, he deposits an additional$1,000 each
21. Return and Standard Deviation (LO4, CFA2) The 1980s were a good decade for investors in S&P 500 stocks. To find out how good, construct a spreadsheet that calculates the arithmetic average
20. Arithmetic versus Geometric Returns (LO1, CFA1) You are given the returns for the following three stocks:Year Stock A Stock B Stock C 1 8% 3% −24%2 8 13 37 3 8 7 14 4 8 5 9 5 8 12 4 Calculate
19. Arithmetic and Geometric Returns (LO1, CFA1) A stock has had the following year-end prices and dividends:Year Price Dividend 0 $13.25 —1 15.61 $.15 2 16.72 .18 3 15.18 .20 4 17.12 .24 5 20.43
18. Arithmetic and Geometric Returns (LO1, CFA1) A stock has returns of –9 percent, 17 percent, 9 percent, 14 percent, and –4 percent. What are the arithmetic and geometric returns?
17. Geometric Averages (LO2) Look back to Figure 1.1 and find the value of $1 invested in each asset class over this 93-year period. Calculate the geometric return for small-company stocks,
16. Forecasting Returns (LO1) You have found an asset with a 12.60 percent arithmetic average return and a 10.24 percent geometric return. Your observation period is 40 years. What is your best
15. Geometric Return (LO1, CFA1) Your grandfather invested $1,000 in a stock 50 years ago.Currently the value of his account is $324,000. What is his geometric return over this period?
14. Risk Premiums (LO2) Refer to Table 1.1 for large-company stock and T-bill returns for the period 1973–1977:a. Calculate the observed risk premium in each year for the common stocks.b. Calculate
13. Using Returns Distributions (LO2, CFA2) Based on the historical record, what is the approximate probability that an investment in small stocks will double in value in a single year? How about
12. Using Returns Distributions (LO4, CFA2) Based on the historical record, if you invest in long-term U.S. Treasury bonds, what is the approximate probability that your return will be below –3.9
11. Returns and the Bell Curve (LO4, CFA3) An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment are at
10. Returns and the Bell Curve (LO4, CFA3) An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at
9. Arithmetic and Geometric Returns (LO1, CFA1) A stock has had returns of 21 percent, 12 percent, 7 percent, –13 percent, –4 percent, and 26 percent over the last six years. What are the
8. Geometric Returns (LO1, CFA1) Using the information from Problem 5, what is the geometric return for Cherry Jalopies, Inc.?
7. Return Calculations (LO1, CFA1) A particular stock has a dividend yield of 1.2 percent. Last year, the stock price fell from $65 to $59. What was the return for the year?
6. Calculating Variability (LO4, CFA2) Using the information from Problem 5, calculate the variances and the standard deviations for Cherry and Straw.

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