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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

LG1 Understand the meaning of the term investment and the factors used to differentiate types of investments.
LG2 Describe the investment process and types of investors.
LG3 Discuss the principal types of investments.
LG4 Describe the steps in investing, review fundamental tax considerations, and discuss investing over the life cycle.
LG5 Describe the most common types of short-term investments.
LG6 Describe some of the main careers open to people with financial expertise and the role that investments play in each.
1.1 Define the term investment, and explain why individuals invest.
1.2 Differentiate among the following types of investments, and cite an example of each: (a) securities and property investments; (b) direct and indirect investments; (c) debt, equity, and derivative
1.3 Define the term risk, and explain how risk is used to differentiate among investments.
1.4 What are foreign investments, and what role do they play today for the individual investor?
1.6 Classify the role of (a) government, (b) business, and (c) individuals as net suppliers or net demanders of funds. 1.7 Differentiate between individual investors and institutional investors.
1.8 What are short-term investments? How do they provide liquidity?
1.9 What is common stock, and what are its two sources of potential return?
1.11 What should an investor first establish before developing and executing an investment program? Briefly describe each of the seven steps involved in investing.
1.12 What are four common investment goals?
1.13 Define and differentiate among the following. Explain how each is related to federal income taxes.a. Active incomec. Capital gaine. Tax planningb. Portfolio and passive incomed. Capital lossf.
1.14 Describe the differing investment philosophies typically applied during each of the fol- lowing stages of an investor's life cycle.a. Youth (ages 20 to 45)b. Middle age (ages 45 to 60)c.
1.15 Discuss the relation between stock prices and the business cycle.
1.16 What makes an asset liquid? Why hold liquid assets? Would 100 shares of IBM stock be considered a liquid investment? Explain.
1.17 Explain the characteristics of short-term investments with respect to purchasing power and default risk.
1.19 Define, compare, and contrast the following short-term investments.a. Series EE savings bondsb. U.S. Treasury billsc. Certificates of depositd. Commercial papere. Banker's acceptancesf. Money
1.20 Why is an understanding of investment principles important to a senior manager working in corporate finance?
1.21 Why do insurance companies need employees with advanced training in investments?
Q1.2 What role, if any, will short-term vehicles play in your portfolio? Why? Complete the fol- lowing table for the short-term investments listed. Find their yields in a current issue of The Wall
P1.1 Sonia Gomez, a 45-year-old woman, wishes to accumulate $250,000 over the next 15 years to supplement the retirement programs that are being funded by the federal government and her employer. She
P1.2 During 2009, the Allens and the Zells both filed joint tax returns. The Allens' taxable income was $130,000, and the Zells had total taxable income of $65,000 for the tax year ended December 31,
P1.3 Jason Consalvo, a 53-year-old software engineer, and his wife, Kerri, have $50,000 to invest. They will need the money at retirement in 10 years. They are considering two invest- ments. The
P1.4 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 2.
P1.5 Judd Read and Judi Todd, senior accounting majors at a large midwestern university, have been good friends since high school. Each has already found a job that will begin after graduation. Judd
P1.6 Carolyn Bowen, who just turned 55, is employed as a administrative assistant for the Xcon Corporation where she has worked for the past 20 years. She is in good health, lives alone, and has two
P1.7 In the following chapters of this text, you will be asked to solve spreadsheet problems using Microsoft Excel. While each person's skill and experience with Excel will vary, we assume that you
What is the nature of the industry? Is it monopolistic, or are there many competitors?Do a few set the trend for the rest, and if so, who are those few?
Briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. Note how economic issues fit into industry analysis.
What are the important financial and operating considerations? Is there an adequate supply of labor, material, and capital? What are the capital spending plans and needs of the industry?
Which economic forces are especially important to the industry? Is demand for the industry’s goods and services related to key economic variables? If so, what is the outlook for those variables?
How important are technological developments? Are any new developments taking place? What impact are potential breakthroughs likely to have?
What role does labor play in the industry? How important are labor unions?Are there good labor relations within the industry? When do contracts expire?
Is the industry regulated? If so, how and by what agency is it regulated? How“friendly” are the regulatory bodies?
Which of the following portfolios would be off the efficient frontier?Portfolio Expected Return Risk A 13% 17%B 12% 18%C 18% 30%
Both Portfolio Y and Portfolio Z are well diversified. The risk-free rate is 6%, the expected return on the market is 15%, and the portfolios have these characteristics:Portfolio Expected Return Beta
Describe an asset-backed security (ABS), and identify some forms of collateral used with these issues. Briefly note how an ABS differs from an MBS. What is the central idea behind securitization?
Bonds are said to be quoted “as a percent of par.” What does that mean? What is one point worth in the bond market?
What is the difference between a premium bond and a discount bond? What three attributes are most important in determining an issue’s price volatility?
What is the difference between a call feature and a sinking-fund provision? Describe the three types of call features. Can a bond be freely callable but nonrefundable?
Can issue characteristics (such as coupon and call features) affect the yield and price behavior of bonds? Explain.
Identify and briefly describe the five types of risk to which bonds are exposed. What is the most important source of risk for bonds in general? Explain.
What appeal do bonds hold for investors? Give several reasons why bonds make attractive investment outlets.
Describe each of the following approaches to technical analysis, and note how it would be used by investors.a. Confidence indexb. Arms indexc. Odd-lot tradingd. Chartinge. Moving averagesf.
The recent price per share of Dragon Vacations Inc. is $50 per share. Calls with exactly six months left to expiration are available on Dragon with strikes of $45, $50, and $55.The prices of the
9.1 An investor writes a call option priced at $3 with an exercise price of $100 on a stock that he owns. The investor paid $85 for the stock. If at expiration of the call option the stock price has
8.1 A call with a strike price of $40 is available on a stock currently trading for $35. The call expires in one year, and the risk-free rate of return is 10%.The lower bound on this call’s valuea.
7.1 Compare an American call with a strike of 50 that expires in 90 days with an American call on the same underlying asset that has a strike of 60 and expires in 120 days. The underlying asset is
6.1 Unless far out-of-the-money or far in-the-money, for otherwise identical call options, the longer the term to expiration, the lower the price fora. American call options but not European call
5.1 Consider the following statements regarding futures contracts that may be settled by delivery:Statement 1: “The long initiates the delivery process.”Statement 2: “For many such contracts,
4.1 Consider the following statements about a futures clearinghouse:Statement 1: “A clearinghouse in futures contracts allows for the offsetting of contracts prior to delivery.”Statement 2: “A
3.1 Consider a put with a strike price of $20 and a premium of $4. If the stock price is currently $18, what is the maximum loss to the naked writer of the put?a. $16b. $20c. Unlimited
2.1 Consider a put with a strike price of $20 and a premium of $4. If the stock price is currently $18, what is the breakeven price for the buyer of the put?a. $16b. $22c. $24
1.1 Which of the following methods is an investor least likely to use to terminate a futures contract?a. Exchanging cash for physical assetsb. Permitting the contract to expire worthlessc. Making an
One of the unique features of futures contracts is that they have only one source of return–the capital gains that can accrue when price movements have an upward bias. Remember that there are no
Alessandro reads in an Italian newspaper that the European economy is heading into a deflationary period, and the ECB is using different stimulus strategies to support growth in the euro area. At the
Jean Paul’s father, a famous French businessman, left him €4 million. Jean Paul invested that money in the French stock market, investing in 20 of the largest capitalization stocks in France.
Jean Paul holds €500,000 worth of French Treasury notes. These bonds are currently being quoted at 105% of par. He is concerned that rates are headed up over the next six months and would like to
Francesco has been investing in the Italian Stock Exchange, based in Milan, for a long time. He is an aggressive investor and likes to short sell whenever he sees an opportunity.Recently, he became
Pierre’s uncle recently passed away and left him €500,000, which he will receive in three months. He wants to invest the money in safe, interest-bearing instruments, and he believes French
Based on the following information, calculate the profit and loss you would make in each of the futures transactions listed on the Australian futures market. (Hint: For information regarding the
Three of the biggest U.S. commodities exchanges—the CME, CBOT, and NYMEX—were identified in this chapter. Other U.S. exchanges and several foreign commodities exchanges are also closely followed
Note several approaches to investing in commodities and explain the investment objectives of each.
List and briefly define five essential parts of a commodities contract. Which parts have a direct bearing on the price behavior of the contract?
Explain how margin trading is conducted in the futures market.a. What is the difference between an initial margin and a maintenance margin?b. Are investors ever required to put up additional margin?
Why are both hedgers and speculators important to a futures market?
John has been following the stock market very closely over the past 18 months and has a strong belief that future stock prices will be significantly higher. He has two alternatives that he can
Repeat the analysis of Problem 14.18, assuming that the volatility of the stock’s return is 40%. Intuitively, would you expect this to cause the call price to rise or fall?By how much does the call
Pierre frequently invests in the stock market and uses stock-index options. He is sure that the market is about to undergo a broad retreat, reflecting the poor economic data and business sentiment in
Refer to Problem 14.9. What would the loss of the seller of the put option be if, at expiration, XLB is trading at $20? What would the profit of the seller be if, at expiration, XLB is trading at $25?
You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their
For each of the 100-share options shown in the following table, use the underlying stock price at expiration and other information to determine the amount of profit or loss an investor would have
Repeat the analysis of Problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of
Look at the Facebook option quotes in Figure 14.1, and focus on the call and put options with a strike price of $80. Can you use put-call parity to infer what the market price of Facebook stock must
Using the resources at your campus or public library (or on the Internet), complete each of the following tasks. (Note: Show your work for all calculations.)a. Find an in-the-money call that has two
In Table 14.2, notice that among the options expiring in one month, the option with the highest time value is the one with a strike price of $70. Likewise, among the options expiring in three months,
Using the Facebook stock option quotations in Figure 14.1, find the option premium, the time value, and the stock index breakeven point for the following puts and calls.a. The August put with a
Identify and briefly discuss two ways to use stock-index options. Do the same for foreign currency options.
Describe three ways in which investors can use stock options.
How do you find the intrinsic value of a call? Of a put? Does an out-of-the-money option have intrinsic value?
Why do call and put options have expiration dates? Is there a market for options that have passed their expiration dates?
What are the main investment attractions of call and put options? What are the risks?
Describe call and put options. Are they issued like other corporate securities?
Western Investments holds a fixed-income portfolio composed of four bonds whose market values and durations are given in the following table.Bond A Bond B Bond C Bond D Market $200,000 $300,000
An analyst gathered the following information about a portfolio’s performance over the past 10 years:Mean annual return 11.8%Standard deviation of annual returns 15.7%Portfolio beta 1.2 If the mean
An analyst gathered the following information:Portfolio Mean Return Standard Deviation of Returns 1 9.8% 19.9%2 10.5% 20.3%3 13.3% 33.9%If the risk-free rate of return is 3.0 percent, the portfolio
Do funds that are likely to trade at substantial discounts from their net asset values include exchange-traded funds? closed-end funds?a. No Nob. No Yesc. Yes No
Does trading take place only once a day at closing market prices in the case of exchange-traded funds? traditional mutual funds?a. No Nob. No Yesc. Yes No
An analyst compared the performance of a hedge fund index with the performance of a major stock index over the past eight years. She noted that the hedge fund index (created from a database) had a
Theodhora lives in Albania and works as a data architect at a major bank. Since she is paid more than L140,000 (Albanian lek) each month, and there are three tax brackets in the country, she falls in
Describe the two items an investor should consider before reaching a decision to sell an investment.
Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.
Why is Jensen’s measure (Jensen’s alpha) generally preferred over the measures of Sharpe and Treynor for assessing portfolio performance? Explain.
Briefly describe each of the following measures for assessing portfolio performance and explain how they are used.a. Sharpe’s measureb. Treynor’s measurec. Jensen’s measure (Jensen’s alpha)
Why is comparing a portfolio’s return to the return on a market index inadequate?
Under what three conditions would an investment holding be a candidate for sale?What must be true about the expected return on a risky investment, when compared with the return on a low-risk

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