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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

What are indicators of bond market behavior, and how are they different from stock market indicators? Name three sources of bond yield data.
Which indexes can you use to compare your investment performance with general market returns? Briefly explain each of these indexes.
What role do an investor’s personal characteristics play in determining portfolio policy?
In the absence of any load charges, open-end mutual funds are priced at (or very close to) their net asset values, whereas closed-end funds rarely trade at their NAVs.Explain why one type of fund
Describe an ETF, and explain how these funds combine the characteristics of both open-end and closed-end funds. Consider the Vanguard family of funds. Which of its funds most closely resembles a
For each pair of funds listed, select the one that is likely to be less risky. Briefly explain your answer.a. Growth versus growth-and-income fundsb. Equity-income versus high-grade corporate bond
Based on the information on the Blackrock website (https://www.blackrock.com/ca/individual/en/library), describe the iShares Conservative Short Term Strategic Fixed Income ETF. Select any ETF on this
Discuss the types of risk that mutual fund shareholders face. What is the major risk exposure of mutual funds? Are all funds subject to equal risk? Explain.
Identify three potential sources of return to mutual fund investors, and briefly discuss how each could affect total return to shareholders. Explain how the discount or premium of a closed-end fund
What is the dominant type of closed-end fund? How do CEFs differ from open-end funds?
How important is the behavior of the market in affecting the price performance of mutual funds? Explain. Does the future behavior of the market matter in the selection process? Explain.
What is an asset allocation fund, and how does it differ from other types of mutual funds? How does a target date fund work?
What is the difference between the variable-growth dividend valuation model and the free cash flow to equity approach to stock valuation? Which procedure would work better if you were trying to value
How can valuation help you tell whether a security is a worthwhile investment?What role does the required return play in this process? Would you invest in a stock if it offered a rate of return that
How can a company’s growth prospects affect its P/E multiple? How about the amount of debt a firm uses? Are there other factors that affect a firm’s P/E ratio?
Are the firm’s expected future earnings important in determining a stock’s investment merits? Discuss how stock valuation relies on these and other future estimates.
Assume that a wealthy woman comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she can over a
Listed are three pairs of stocks. Look at each pair and select the security you think is worth more money. Then, after you make all three of your selections, use Yahoo! Finance or some other source
Given the information in Figure 6.4, answer the following questions for Netflix.a. On what day did the trading activity occur?b. At what price did the stock sell when the market closed?c. What is the
With all the securities available in the United States, why would a U.S. investor want to buy foreign stocks? Describe the two ways in which a U.S. investor can buy stocks in a foreign company. As a
What is the difference between a cash dividend and a stock dividend? Which would be more valuable to you? How does a stock dividend compare with a stock split? Is a 200% stock dividend the same as a
Briefly explain how the dividend decision is made. What factors are important in deciding whether, and in what amount, to pay dividends?
What is a stock spin-off? In very general terms, explain how a stock spin-off works.
What are some of the advantages and disadvantages of owning common stock?What are the major risks to which stockholders are exposed?
What are two or three of the major investment attributes of common stocks?
Classify the roles of (a) government, (b) business, and (c) individuals as net suppliers or net demanders of funds.
What should an investor establish before developing and executing an investment program? Briefly describe the elements of an investment policy statement.
For each of the items in the left-hand column, select the most appropriate item in the right-hand column.a. Prospectus 1. Trades unlisted securitiesb. Underwriting 2. Buying securities from firms and
What are electronic communication networks?
Differentiate between a bull market and a bear market.
List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor’s Corporation. Indicate the number and type of securities used in calculating each average or
Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.
Explain how either the present value (of benefits versus cost) or the IRR measure can be used to find a satisfactory investment. Given the following data, indicate which, if any, of these investments
What is correlation, and why is it important? Describe the characteristics of returns that are (a) positively correlated, (b) negatively correlated, and (c) uncorrelated.Differentiate between perfect
Discuss how correlation affects the risk and return of a portfolio of two securities.Does correlation affect the maximum or minimum return that a portfolio of two assets can achieve? How are the
Briefly define and give examples of each of the following components of total risk.Which type of risk matters, and why?a. Diversifiable (or firm-specific) riskb. Undiversifiable (or systematic) risk
Explain what is meant by beta. What risk does beta measure? What is the market return? How is the interpretation of beta related to the market return?
Define and differentiate among the diversifiable, undiversifiable, and total risk of a portfolio. Which risk is relevant in predicting the return that a portfolio may earn?How is it measured?
How does an investor diversify?
What activity leads to a lower expected return and considerable risk?
Assume a stock selling for $100 pays a $8 dividend. How much will the owner of one share net if:a. A zero tax rateb. A 0.35 tax ratec. A 0.65 tax rated. A 0.15 tax rate
Name an investment that has zero risk.
An investment of $100 earns 0.10 per year for three years. At time 3, the investment’s value will be $ .
If you have $133.10 at time 3, and assuming a 0.10 discount rate, the present value is $ .
A stock is now selling at $50 and is expected to sell at $56 in one year. It pays $2 a year dividend. What return will the investor expect to earn?
(Continue 3). What is the firm’s dividend yield?
An investment has the following expected cash flows:Funds can be borrowed at 0.08. Assume zero taxes.If the investor borrows $800, what return will an investor buying the equity earn? Time 0 Time 1
Taxable securities yield 0.10 and tax exempts yield 0.06.What is the tax rate that an investor must have to buy a tax exempt, if the investor wants to buy a debt security?
A gamble costing $200 has the following two outcomes:0.3 1,000 0.7 0a. What is the expected value of this gamble?b. Is this a fair gamble?
There are ten independent investment alternatives each with a variance of outcomes of 100,000.Buying equal amounts of each of the ten securities, the variance of the portfolio will be .
Assume a gamble has two equally likely outcomes, 50 and 30.a. Compute the expected return.b. Compute the variance.c. Compute the standard deviation.
Compare the riskiness of the gamble of problem 3 with the riskiness of the gamble described in the chapter where the two outcomes were $30 and $20.
A bond promises to pay $1,000 at time 2 and nothing sooner. The market interest rate for this bond is 0.10.What is the expected market price of the bond?
(Continue 1). What is the expected market price if the market interest rate is 0.20?
(Continue 1). When the market interest rate goes up the bond value changes. How?
A stock is selling at $40 per share. The stock price is expected to be $50 one year from today. The stock pays $2 per year dividend.The stock’s expected return is .
(Continue 4). If the investor’s time value factor is 0.12 (the investor’s opportunity cost), the value of the stock to the investor is $ .Should the investor buy or sell?
John K. has hired a financial advisor who charges 0.05 on assets managed.John K. has all his funds invested in mutual funds that incur expenses (including fees) of 0.02. The mutual fund is expected
A stock is paying a $5 annual dividend. Investors want a 0.15 annual return from this stock. The dividend is expected to grow at 0.10 per year.What is the stock value today?
(Continue 1). What is the stock value if the expected annual growth rate is 0.14?
(Continue 1). What is the stock value if the expected annual growth rate is 0.05?
(Continue 1–3). What are the P/E ratios if the firm has annual earnings of $20 per share?
The owner of a stock sells a call option on the stock for $4. The exercise price is $30. When the call option expires, the stock is selling for $50.How much did the seller of the call option win?
A stock has a Beta of one. The risk free (default free) rate is 0.05 and the market’s expected return is 0.09.What is the stock’s required expected return?
An investor sells a put option on a stock for $4. The exercise price is$40. When the put option expires, the stock is selling at $5.How much did the seller of the put win?
Assume ABC Corporation’s balance sheet showed the following measures:a. Compute the firm’s quick ratio.b. Compute the firm’s current ratio. Cash Accounts Receivable $ 5,000 3,000 Inventories
(Continue 1). The firm has $30,000 of total debt and funds from operations of $15,000.Compute some measures that give an indication of financial viability.
The following facts apply to the XYZ Company:The firm’s market capitalization (shares outstanding times market price)is $450,000.a. Compute the P/E ratio.b. Compute the Current Price/EBITDA ratio.
A $1,000 bond selling at $1,000 pays $50 annual interest.A stock is selling at $40 and is earning $2 per share.Which security offers the better return?
Assume bond interest is taxed at 0.35 and dividends on common stock at 0.15. Assume bonds are yielding 0.06 interest (before tax).To obtain the same after-tax cash flow, the dividend yield would have
(Continue 2). If the dividend yield from common stock is 0.05 and 0.0425 after tax, what interest does a bond have to pay to offer the investor the same 0.0425 return?
(Continue 2). The corporation can pay a $100 dividend and the investor can earn 0.10 (after tax) on the investment for one year.Alternatively, the firm can retain the $100, earn 0.12 for one year and
(Continue 2 and 4). Is it reasonable that the investor only earns 0.10 when the firm earns 0.12?
Mr. Smith can borrow at 0.06 and investments are expected to earn 0.10 in a tax deferral account. Mr. Smith’s tax rate is 0.35.Assume Mr. Smith borrows $1,000 to pay for the $1,000 placed in a tax
The investor has decided to invest $1,000 in a tax deferral (can earn 0.10) or a taxed account (can earn 0.085). The tax deferral account will result in an immediate $350 tax saving. The tax rate on
An investor saves $10,000 a year and earns 0.20. After two years ($10,000 is saved three times)At time 2, the investor will have $ . Time Cash 0 10,000 1 10,000 2 10,000
(Continue 3). At time 3, the investor will have $ .
(Continue 3 and 4). Assuming the invested funds can earn 0.20 and four payments are made into the investment account, the investor can spend$ each year for perpetuity (first payment at time 5).
Company A has 1,000,000 shares of common stock outstanding. The stock sells for $50 per share. The common stock pays $2 per share dividend(an annual payment).The market values the $2 dividend at
(Continue 1). The firm does not pay a dividend but it does buy back 40,000 shares at $50 per share.a. The new stock price, after repurchase, will be $ ________________.b. If the investor sells zero
Assume a stock is selling at a price of $50. The company is buying back 0.04 of its stock each year.a. The expected price after one year is $ _______________.b. The expected price after five years is
Assume you borrow $10,000 and the interest rate on this loan is 0.20(credit card debt frequently has interest rates of this magnitude). Determine the amount you owe after the following years: Year 1
Assume you borrow $10,000 per year (at the end of the year) and the interest rate on these loans is 0.20. Determine the amount you owe after the following years: Year 1 10 20 Amount Owed
Assume you successfully determine the right time to sell your stock portfolio because the market is overpriced.What is the problem?
Between the end of September and the end of November 1929, industrial stocks fell by 48%.Does this “prove” the market was too high?
The year 1933 was the year with the highest return to be earned (54%)by investing in stocks. What lesson does this impart?
Assume a corporation has a 70% dividend received deduction for stock dividends. Only 30% of the dividend is subject to the 0.35 corporate tax.Assume a preferred stock has a dividend yield (before
Assume the stock market is too high and it is expected to decrease in value over the next period. Cash dividends are 0.25 of market value.Dividends are taxed at 0.15.The investor can invest in a
Define and differentiate between real estate and other tangibles. Give examples of each of these forms of investment.
How does real estate investment differ from securities investment? Why might adding real estate to your investment portfolio decrease your overall risk? Explain.
Define and differentiate between income property and speculative property. Differentiate between and give examples of residential and commercial income properties.
Briefly describe the following important features to consider when making a real estate investment.a. Physical propertyb. Property rightsc. Time horizond. Geographic area
What role does demand and supply play in determining the value of real estate? What are demographics and psychographics, and how are they related to demand? How does the principle of substitution
How do restrictions on use, location, site, improvements, and property management affect a property’s competitive edge?
Are real estate markets efficient? Why or why not? How does the efficiency or inefficiency of these markets affect both promotion and negotiation as parts of the property transfer process?
What is the market value of a property? What is real estate appraisal? Comment on the following statement: “Market value is always the price at which a property sells.”
Briefly describe each of the following approaches to real estate market value:a. Cost approachb. Comparative sales approachc. Income approach
What is real estate investment analysis? How does it differ from the concept of market value?
What is leverage, and what role does it play in real estate investment? How does it affect the risk–return values of a real estate investment?
What is net operating income (NOI)? What are after-tax cash flows? Why do real estate investors prefer to use ATCFs?

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