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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

15.2 Discuss the difference between a cash market and a futures market.
15.1 What is a futures contract? Briefly explain how it is used as an investment vehicle.
Discuss the trading techniques that can be used with financial futures and note how these securities can be used in conjunction with other investment vehicles.
Explain the difference between a physical commodity and a financial future, and discuss the growing role of financial futures in the market today.
Discuss the various trading strategies investors can use with commodities and explain how investment returns are measured.
Describe the commodities segment of the futures market and the basic characteristics of these investment vehicles.
Explain the role that hedgers and speculators play in the futures market, including how profits are made and lost.
Describe the essential features of a futures contract and explain how the futures market operates.
2. In scenario 2, if the share price three months from now is $42:a. What is the long-position profit or loss?b. What is the breakeven point of the call option?c. Is the option in- or
1. In scenario 1, if the share price three months from now is $58:a. What is the long-position profit or loss?b. What is the break-even point of the call option?c. Is the option in- or
4. Should Fred use the puts as a hedge? Explain. Under what conditions would you urge him not to use the puts as a hedge?
3. Assuming Fred uses three puts to hedge his position, indicate the amount of profit he will generate if the share moves to $10 by the expiration date of the puts. What if it drops to $5 per share?
2. What will Fred’s minimum profit be if he buys three puts at the indicated option price? How much would he make if he didn’t hedge but instead sold his shares immediately at a price of $7.50
1. Given the circumstances surrounding Fred’s current investment position, what benefits could be derived from using the puts as a hedge device? What would be the major drawback?
3. Which course of action would you recommend if Phil simply wants to maximise profit? Would your answer change if other factors (for example, comparative risk exposure) were considered along with
2. Using a six-month holding period and assuming the share does indeed rise to $8 over this time frame:a. Find the value of both calls, given that at the end of the holding period neither contains
1. How many alternative investment vehicles does Phil have if he wants to invest in RPP for no more than six months? What if he has a two-year investment horizon?
P14.11 A share trades for $27 per share. A call option on that share has a strike price of $25 and an expiration date nine months in the future. The volatility of the share’s returns is 45%, and
P14.10 Rick owns shares in a retailer that he believes is highly undervalued. Rick expects that the share will increase in value nicely over the long term. He is concerned, however, that the entire
P14.9 Angelo Martino just purchased 5000 shares of Norman Harvey Ltd at $6.15, and he has decided to write covered calls against these shares. Accordingly, he sells five Norman Harvey calls at their
P14.8 C.F. Wong holds a well-diversified portfolio of high-quality, large-cap shares. The current value of Wong’s portfolio is $475 000, but he is concerned that the market is heading for a big
P14.7 Bill Polaski holds 6000 shares in SNS Transport. He bought the shares several years ago at $4.85, and the shares are now trading at $7.50. Bill is concerned that the market is beginning to
P14.6 Dorothy McBride does a lot of investing in the sharemarket and is a frequent user of market-index options. She is convinced that the market is about to undergo a broad retreat and has decided
P14.5 A six-month call on a certain share carries a strike price of $60. It can be purchased at a cost of $6000. Assume that the underlying share rises to $75 by the expiration date of the option.
P14.4 Crew is trading at $36. Put options with a strike price of $27.50 are priced at $0.85.What is the intrinsic value of the option, and what is the time value?
P14.3 Verizon is trading at $36. Put options with a strike price of $45 are priced at $10.50.What is the intrinsic value of the option, and what is the time value?
P14.2 Gillette is trading at $31.11. Call options with a strike price of $35 are priced at $0.30.What is the intrinsic value of the option, and what is the time value?
P14.1 Cisco is selling for $19. Call options with an $18 exercise price are priced at $2.50. What 3 is the intrinsic value of the option, and what is the time value?
Q14.4 Using the resources available at your campus or 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 or
Q14.3 Assume you hold a well-balanced portfolio of shares.a. Under what conditions might you want to use a share-index (or ETF) option to hedge the portfolio?b. Briefly explain how such options could
Q14.2 Alcan shares recently closed at $52.51. Assume that you write a covered call on Alcan by writing one September call with a strike price of $55, and buying 1000 shares at the market price. The
Q14.1 Review the ASX website and examine the information provided on options and options trading. What information is supplied, and what is useful to understanding options trading?
14.14 Why would an investor want to use index options to hedge a portfolio of shares?
14.13 Identify and briefly discuss two different ways to use share-index options. Do the same for foreign currency options.
14.12 Briefly describe the differences and similarities between share-index options and share options.
14.11 What’s the most that can be made from writing calls? Why would an investor want to write covered calls? Explain how you can reduce the risk on an underlying share by writing covered calls.
14.10 Describe at least three different ways in which investors can use share options.
14.9 Name at least four variables that affect the price behaviour of listed options, and briefly explain how each affects prices. How important are fundamental (intrinsic) value and time value (a) to
14.8 How do you find the intrinsic (fundamental) value of a call? Of a put? Does an out-of-themoney option have intrinsic value?
14.7 Briefly explain how you would make money on (a) a call option and (b) a put option. Do you have to exercise the option to capture the profit?
14.6 Why do put and call options have expiration dates? Is there a market for options that have passed their expiration dates?
14.5 What is a strike price? How does it differ from the market price of the share?
14.4 What is a share option? What is the difference between a share option and a derivative security? Describe a derivative security and give several examples.
14.3 What are the main investment attractions of put and call options? What are the risks?
14.2 What are listed options, and how do they differ from conventional options?
14.1 Describe put and call options. Are they issued like other corporate securities?
Describe market index options, puts and calls on foreign currencies, and discuss how these securities can be used by investors.
Explain the profit potential and loss exposure from writing covered call options and discuss how writing options can be used as a strategy for enhancing investment returns.
Describe the profit potential of puts and calls and note some popular put and call investment strategies.
Explain how put and call options are valued and the forces that drive options prices in the marketplace.
Describe the options market and note key options provisions, including strike prices and expiration dates.
Discuss the basic nature of options in general and puts and calls in particular and understand how these investment vehicles work.
6. What is the return on the portfolio after the 12-month period?
4. What is the year-end (February 2012) portfolio value?5. What is the profit or loss as of the end of February 2012?
3. What is the average cost per share?
2. What is the total number of Neo shares purchased over the 12-month period?
1. What is the total investment over the period from March 2011 through February 2012?
5. Compare and contrast your results from questions 1 through 4. You may want to summarise them in tabular form. Which plan would appear to have been most beneficial in timing Charles’s portfolio
4. Repeat question 2 for the variable-ratio plan. Be sure to answer all parts.
3. Repeat question 2 for the constant-ratio plan. Be sure to answer all parts.
2. Using the constant-dollar plan, determine the year-end portfolio value expressed both in dollars and as a percentage of the amount initially invested for (a) the conservative portion, (b) the
1. Under the dollar-cost averaging plan, determine the total number of shares purchased, the average cost per share, and the year-end portfolio value expressed both in dollars and as a percentage of
4. On the basis of your analysis in questions 1, 2 and 3, what, if any, recommendations might you offer them relative to the revision of their portfolio? Explain your recommendations.
3. Use the HPR calculated in question 1 to compute Jensen’s measure (Jensen’s alpha). Use that measure to analyse the performance of the portfolio on a risk-adjusted, market-adjusted basis.
2. Recognising that all gains on their investments were unrealised, calculate the before-tax portfolio HPR for their four-asset portfolio during the past calendar year. Evaluate this return relative
1. Calculate the holding period return on a before-tax basis for each of these four assets.
P13.20 Refer to the table below: 5LG 5LG MM Managed Fund Time Period Unit Price Units Fund NAV Units 1 $20.00 1000 $20.00 1000 2 $30.00 1000 $19.00 1000 Price per Share of FCI Month Year 1 Year 2
P13.19 Refer to Problem 13.18. Now assume you are using a constant-ratio plan with a rebalance trigger of speculative-to-conservative of 1.25. What action, if any, should you take in time period 2?
P13.18 Refer to the table below: 5LG MM Managed Fund Time Period Share Price Shares Fund NAV Shares 1 $20.00 1000 $20.00 1000 2 $25.00 $21.00 Assume you are using a constant-dollar plan with a
P13.17 Over the past two years, Jon has used a dollar-cost averaging formula to purchase $300 worth of FCI shares each month. The price per share paid each month over the two years is given in the
P13.16 The risk-free rate is currently 8.1%. Use the data in the accompanying table for the Fio family’s portfolio and the market portfolio during the year just ended to answer the questions that
P13.15 Chee Chow’s portfolio has a beta of 1.3 and earned a return of 12.9% during the year just ended. The risk-free rate is currently 7.8%. The return on the market portfolio during the year just
P13.14 Your portfolio returned 13% last year, with a beta equal to 1.5. The market return was 10% and the risk-free rate 6%. Did you earn more or less than the required rate of return on your
P13.13 During the year just ended, Anna’s portfolio, which has a beta of 0.90, earned a return of 8.6%. The risk-free rate is currently 7.3%, and the return on the market portfolio during the year
P13.12 Your portfolio has a beta equal to 1.3. It returned 12% last year. The market returned 10%; the risk-free rate is 6%. Calculate Treynor’s measure for your portfolio and the market.Did you
P13.11 Niki’s portfolio earned a return of 11.8% during the year just ended. The portfolio’s standard deviation of return was 14.1%. The risk-free rate is currently 6.2%. During the year, the
P13.10 Congratulations! Your portfolio returned 11% last year, 2% better than the market return of 9%. Your portfolio had a standard deviation of earnings equal to 18%, and the riskfree rate is equal
P13.9 On 1 January 2011, Simon’s share portfolio of 15 companies had a market value of$264 000. At the end of May 2011, Simon sold one of the shares, which had a beginning-of-year value of $26 300,
P13.8 Max had a portfolio of long-term bonds that they purchased many years ago. The bonds pay 12% interest annually, and the face value is $100 000. What is his annual HPR on this investment?
P13.7 Linda, who is in a 33% ordinary tax bracket, purchased 10 options contracts for a total cost of $4000 just over one year ago. Linda netted $4700 upon the sale of the 10 contracts today.What are
P13.6 Charlotte bought 2000 shares of the balanced Jolla Fund exactly one year and two days ago for an NAV of $8.60 per share. During the year, the fund distributed investment income dividends of
P13.5 Jill invested $25 000 in the bonds of Industrial Ltd. She held them for 13 months, at the end of which she sold them for $26 746. During the period of ownership she received $2000 interest.
P13.4 Jeff purchased 1000 shares of a speculative share on 2 January for $2.00 per share. Six months later on 1 July he sold them for $9.50 per share. He uses an online broker that charges him $10
P13.3 John Reardon purchased 100 shares of Timco Ltd in December 2010, at a total cost of$1762. He held the shares for 15 months and then sold them, netting $2500. During the period he held the
P13.2 Portfolio A and portfolio B had the same holding period return last year. Most of the returns from portfolio A came from dividends, while most of the returns from portfolio B came from capital
P13.1 Refer to the table below: 1LG 5LG 4LG Fund A Fund B Beta 1.8 1.1 Investor A 20% 80%Investor B 80% 20%As between investor A and investor B, which is more likely to represent a retired couple?
Q13.6 Choose a high-growth managed fund and a defensive managed fund. Find and record their closing net asset values at the end of each week for the immediate past year. Assume that you wish to
Q13.5 Find five actively traded shares and record their prices at the start and the end of the most recent calendar year. Also, find the amount of dividends paid on each during that year and each
Q13.4 Choose six actively traded shares for inclusion in your investment portfolio. Assume the portfolio was created three years earlier by purchasing 200 shares of each of the six shares. Find the
Q13.3 Select a major share, bond and managed fund in which you are interested in investing.For each of them, gather data for each of the past three years on the annual dividends or interest paid and
Q13.2 Choose an established company whose shares are listed and actively traded on the ASX.Find the share’s closing price at the end of each of the preceding six years and the amount of dividends
Q13.1 List your personal characteristics and then state your investment objectives in light of them. Use these objectives as a basis for developing your portfolio objectives and policies.Assume that
13.24 Describe the two items an investor should consider before reaching a decision to sell an investment vehicle.
13.23 Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.
13.22 Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?
13.21 Briefly describe each of the following plans and differentiate among them.a. Dollar-cost averagingb. Constant-dollar planc. Constant-ratio pland. Variable-ratio plan
13.20 Explain the role that formula plans can play in the timing of security transactions.Describe the logic underlying the use of these plans.
13.19 Explain the role of portfolio revision in the process of managing a portfolio.
13.18 Why is Jensen’s measure (alpha) generally preferred over the measures of Sharpe and Treynor for assessing portfolio performance? Explain.
13.17 Briefly describe each of the following return measures available for assessing portfolio performance and explain how they are used.a. Sharpe’s measureb. Treynor’s measurec. Jensen’s

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