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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

P6.2 An investor deposits $20 000 into a new brokerage account. The investor buys 1000 Tipco shares for $19 per share. Two weeks later, the investor sells the Tipco shares for $20 per share.When the
P6.1 An investor owns some shares in General Refrigeration & Cooling. The share recently underwent a 5-for-2 share split. If the share was trading at $50 just before the split, how much is each share
Q6.6 Briefly define each of the following types of investment programs and note the kinds of share (e.g. blue chips, speculative shares) that would best fit with each.a. A buy-and-hold strategyb. A
Q6.5 Identify and briefly describe the three sources of return to Australian investors in foreign shares. How important are currency exchange rates? With regard to currency exchange rates, when is
Q6.4 Assume that a wealthy individual comes to you looking for some investment advice. She is in her early forties and has $250 000 to put into shares. She wants to build up as much capital as she
Q6.3 Listed below are three pairs of shares. Look at each pair and select the security you would like to own, given that you want to select the one that’s worth more money. Then, after you make all
Q6.2 Given the information in the quote in Figure 6.2 (page 182), answer the following questions for Stockland.a. On what day did the trading activity occur?b. At what price did the share sell at the
Q6.1 Look at the record of annual share returns in Table 6.1 (page 176), particularly the return performance during the 1980s, 1990s and 2000–2010.a. How would you compare the returns during the
6.16 Which investment approach (or approaches) do you feel would be most appropriate for a quality-conscious investor? What kind of investment approach do you think you’d be most comfortable with?
6.15 With all the securities available in this country, why would an investor want to buy foreign shares? Briefly describe the two ways in which an investor can buy shares in a foreign company. As a
6.14 Why do most value shares offer only limited capital gains potential? Does this mean the outlook for continued profitability is also limited? Explain.
6.13 Define and briefly discuss the investment merits of each of the following.a. Blue chipsb. Value sharesc. Mid-cap sharesd. IPOs
6.12 What are dividend reinvestment plans, and what benefits do they offer to investors?Are there any disadvantages?
6.11 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 to a stock split? Is a 200%stock dividend the same as
6.10 Why is the ex-dividend date important to shareholders? If a share is sold on the ex-dividend date, who receives the dividend—the buyer or the seller? Explain.
6.9 Briefly explain how the dividend decision is made. What corporate and market factors are important in deciding whether, and in what amount, to pay dividends?
6.8 Define and differentiate between the following pairs of terms.a. On-market versus off-market share repurchasesb. Par value versus market valuec. Book value versus investment value
6.6 What is a stock split? How does a stock split affect the market value of a share? Do you think it would make any difference (in price behaviour) if the company also changed the dividend rate on
6.5 What are some of the advantages and disadvantages of owning shares? What are the major types of risk to which shareholders are exposed?
6.4 How important are dividends as a source of return? What about capital gains? Which is more important to total return? Which causes wider swings in total return?
6.3 Briefly describe the behaviour of the Australian sharemarket over the last 30 years.
6.2 What are two or three of the major investment attributes of shares?
6.1 What is a share? What is meant by the statement that shareholders are the residual owners of the company?
Describe various types of shares, including foreign shares, and note how shares can be used as investment vehicles.
Discuss share dividends, types of dividends and dividend reinvestment plans.
Understand the different kinds of share values.
Discuss the basic features of ordinary shares, including issue characteristics, quotations and transaction costs.
Describe share returns from a historical perspective and understand how current returns measure up to historical standards of performance.
Explain the investment appeal of ordinary shares and why individuals like to invest in them.
11. If a shares’s market-implied expected return exceeds the capital asset pricing model—predicted required (expected) return, the shares plots on the security market line(SML) as follows:a.
10. iCorporation has a relative systematic risk level that is 40% greater than the overall market. The expected return on the market is 16%, and the risk-free rate is 7%.Using the CAPM, the required
9. Risk that can be diversified away is described as:a. unsystematic riskb. market riskc. systematic risk
8. In the Markowitz model, portfolio risk:a. is equal to the simple sum of the standard deviations of each of the securities in the portfoliob. is equal to the product of the standard deviations of
7. A portfolio that is on the capital market line but to the left of the market portfolio(M) has the following characteristic:a. a lending portfoliob. a borrowing portfolioc. higher unsystematic risk
6. A shares has the following potential returns and the associated probabilities that each will occur.Possible return Probability of occurrence 3% 25%10% 50%25% 12.5%40% 12.5%What is the expected
5. An analyst expects that a company’s net sales will double and the company’s net income will triple over the next five-year period starting now. Based on the analyst’s expectations, which of
4. An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent.What is the internal rate of
3. The adjustment for a shares split in the Standard & Poor’s 500 is accomplished:a. automatically through the market value calculation.b. by deflating the numeratorc. by the adjusted divisor
2. What is the leveraged return of 500 shares of a shares purchased with 40% margin at$15/share that rises to $20/share?a. 55.56%b. 33.33%c. 66.67%
1. An investor bought a share for $50 a month ago and it is currently selling for $45. An order to sell the share if it drops to $40 is a:a. short sale orderb. stop loss orderc. stop buy order
2. Lance has decided that the portfolio will be distributed between AMC and BXB in a 60%and 40% split, respectively. Hence, a weighted average can be calculated for both the returns and betas of the
1. What are the beta values for AMC and BXB? Assume that the beta for the ASX 200 Index is 1.0. Using the CAPM, create a spreadsheet to determine the required rates of return for both AMC and BXB.
5. What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.
4. Compare the nature of the security portfolio inherited by Susan, from the response to question 2, with what you believe would be an appropriate security portfolio for her, from the response to
3. If Susan decided to invest in a security portfolio consistent with her needs—indicated in response to question 1—describe the nature and mix, if any, of securities you would recommend that she
2. Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the
1. Briefly assess Susan’s financial situation and develop a portfolio objective for her that is consistent with her needs.
5. Explain how the traditional approach and modern portfolio theory can be blended into an approach to portfolio management that might prove useful to the individual investor. Relate this to
4. Briefly describe modern portfolio theory (MPT) and relate it to the approaches supported by Wal and Shane. Be sure to mention diversifiable risk, non-diversifiable risk and total risk, along with
3. Briefly describe the traditional approach to portfolio management, and relate it to the approaches supported by Wal and Shane.
2. Analyse Shane’s argument and explain the major error in his logic relative to the use of beta as a substitute for diversification. Explain the key assumption underlying the use of beta as a risk
1. Analyse Wal’s argument and explain why a managed fund investment may be overdiversified. Also explain why one does not necessarily have to have hundreds of thousands of dollars to diversify
P5.25 Referring to Problem 5.24, assume you now have the following annual returns (rj) for 6 each investment. LG 5LG 4LG Using your finding from Problem 5.24 and the additional return data, determine
P5.24 Referring to Problem 5.23, if the risk-free rate is 2% and the market return is 12%, calculate the required return for each portfolio using the CAPM.
P5.23 Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the
P5.22 Share A has a beta of 0.80, share B has a beta of 1.40, and share C has a beta of –0.30.a. Rank these shares from the most risky to the least risky.b. If the return on the market portfolio
P5.21 If portfolio A has a beta of and portfolio Z has a beta of , what do the two values indicate? If the return on the market rises by 20%, what impact, if any, would this have on the returns from
P5.20 For his portfolio, Jack Cashman randomly selected securities from all those listed on the ASX. He began with one security and added securities one by one until a total of 20 securities were
P5.19 Portfolios A through J, which are listed in the following table along with their returns (rp)and risk (measured by the standard deviation, sp), represent all currently available portfolios in
P5.18 The risk-free rate is currently 7%, and the market return is 12%. Assume you are consid- 4 ering the following investments. LG 4LG Investment Vehicle Beta A 1.50 B 1.00 C 0.75 D 0 E 2.00a.
P5.17 Jay is reviewing his portfolio of investments, which include certain shares and bonds. He has a large amount tied up in Treasury notes paying 3%. He is considering moving some of his funds from
P5.15 Referring to Problem 5.14, using the portfolio beta, what would you expect the value of your portfolio to be if the market rallied 20%? Declined 20%?P5.16 Use the capital asset pricing model
P5.14 Referring to Problem 5.13, assume you have a portfolio with $20 000 invested in each of investment A, B and C. What is your portfolio beta?
P5.12 A security has a beta of 1.20. Is this security more or less risky than the market? Explain.Assess the impact on the required return of this security in each of the following cases.a. The
P5.11 Referring to Problem 5.10, if you expected a significant market rally, would your decision be altered? Explain.
P5.10 You are evaluating two possible share investments, Buyme Ltd and Getit Ltd. Buyme has an expected return of 14% and a beta of 1. Getit has an expected return of 14% and a beta of 1.2. Based
P5.9 Imagine you wish to estimate the betas for two investments, A and B. You have gathered the following return data for the market and for each of the investments over the past 10 years,
P5.8 Assume you wish to evaluate the risk and return behaviours associated with various combinations of assets V and W under three assumed degrees of correlation: perfect positive, uncorrelated and
P5.7 Referring to Problem 5.6, what would happen if you constructed a portfolio consisting of assets A, B and C, equally weighted? Would this reduce risk or enhance return?
P5.6 You have been asked for your advice in selecting a portfolio of assets and have been sup- 2 plied with the following data. LG 1LG You have been told that you can create two portfolios—one
P5.4 Refer to Problem 5.3. Assume that asset L represents 60% of the portfolio and asset M 40%. Calculate the average expected return and standard deviation of expected portfolio returns over the
P5.3 Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected
P5.1 Your portfolio had the values in the following table for the four-year period listed. 1 Calculate your average return over the four-year period. LG Expected Return (%)Year Asset F Asset G Asset
Q5.6 Use a published source to select four shares with betas ranging from about 0.50 to 1.50.Record the current market prices of each of these shares. Assume you wish to create a portfolio that
Q5.5 Obtain a product disclosure statement and an annual report for a major managed fund that includes some international securities. Carefully read the reports and study the portfolio’s
Q5.4 From the Australian Financial Review, a website such as Yahoo!7 Finance (http://au.finance.yahoo.com), or some other source, obtain a current estimate of the risk-free rate (use a Treasury
Q5.3 From the Australian Financial Review, a website such as Yahoo!7 Finance (http://au.finance.yahoo.com), or some other source, obtain a current estimate of the risk-free rate (use a Treasury
Q5.2 Using the following guidelines, choose the shares—A, B and C—of three companies that have been public for at least 10 years. Share A should be one you are interested in buying. Share B
Q5.1 State your portfolio objectives. Then construct a 10-share portfolio that you feel is consistent with your objectives. (Use companies that have been public for at least five years.) Obtain
5.6 What benefit, if any, does international diversification offer the individual investor?Compare and contrast the methods of achieving international diversification by investing abroad versus
5.5 Discuss how the correlation between asset returns affects the risk and return behaviour of the resulting portfolio. Describe the potential range of risk and return when the correlation between
5.4 What is diversification? How does the diversification of risk affect the risk of the portfolio compared to the risk of the individual assets it contains?
Describe portfolio betas, the risk–return tradeoff, and reconciliation of the two approaches to portfolio management.
Review the traditional and modern approaches to portfolio management.
Explain the capital asset pricing model (CAPM)—conceptually, mathematically and graphically.
Describe the components of risk and the use of beta to measure risk.
Discuss the concepts of correlation and diversification, and the effectiveness, methods and benefits of international diversification.
Understand portfolio management and the procedures used to calculate the return and standard deviation of a portfolio.
P4A.19 You purchased a car using some cash and borrowing $15 000 (the present value) for 50 months at 12% per year. Calculate the monthly payment (annuity).P4A.20 Referring to Problem 4A.19, assume
P4A.18 Kent Weitz wishes to assess whether the following two investments are satisfactory. Use his required return (discount rate) of 17% to evaluate each investment. Make an investment
P4A.17 Terri Alless has an opportunity to make any of the following investments. The purchase price, the amount of its lump-sum future value and its year of receipt are given below for each
P4A.16 Using a financial calculator or an Excel spreadsheet, calculate the following.a. The present value of $500 to be received four years from now, using an 11%discount rate.b. The present value of
P4A.14 For each of the investments below, calculate the present value of the annual end-of-year returns at the specified discount rate over the given period.
P4A.13 Consider the streams of income given in the following table.a. Find the present value of each income stream, using a 15% discount rate.b. Compare the calculated present values and discuss them
P4A.12 Find the present value of each of the following streams of income, assuming a 12% discount rate.
P4A.10 Referring to Problem 4A.9, at what price would the bond sell if bonds were paying 8%interest compounded annually? Compare your answer to your answer to the preceding problem.
P4A.9 A corporate bond can be converted to $1000 at maturity eight years from purchase. If the bonds are to be competitive with other bonds, which pay 6% interest compounded annually, at what price
P4A.8 For each of the following investments, calculate the present value of the future sum, using the specified discount rate and assuming the sum will be received at the end of the given year.
P4A.5 For each of the following annual deposits into an account paying the stated annual interest rate over the specified deposit period, calculate the future value of the annuity at the end of the
P4A.3 For each of the following initial investment amounts, calculate the future value at the end of the given investment period if interest is compounded annually at the specified rate of return

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