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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

P4A.1 For each of the savings account transactions in the accompanying table, calculate the following.a. End-of-year account balance. (Assume that the account balance at 31 December 2010 is zero.)b.
4A.6 What is a mixed stream of returns? Describe the procedure used to find the present value of such a stream.
4A.4 Describe, compare and contrast the concepts of future value and present value. Explain the role of the discount rate in calculating present value.4A.5 What is an annuity? How can calculation of
4A.2 Define, discuss and contrast the following terms.a. Interestb. Simple interestc. Compound interestd. True rate of interest (or return)
4A.1 What is the time value of money? Explain why an investor should be able to earn a positive return.
4. Ignoring her existing portfolio, what recommendations would you give Molly with regard to shares X and Y?
3. Use your findings to evaluate and discuss the return and risk associated with shares X and Y. Which share seems preferable? Explain.
2. Use the HPRs and expected return calculated in question 1 to find the standard deviation of the HPRs for each share over the 10-year period 2001–2010.
1. Determine the holding period return (HPR) for each share in each of the preceding 10 years. Find the expected return for each share, using the approach specified by Molly.
5. From the information given, which, if either, of the two investments would you recommend that Dave make?Explain your answer.6. Indicate to Dave how much money the extra $50 will have grown to by
4. Use the present-value technique to estimate the yield on each investment. Compare your findings and contrast them with your response to question 3.
3. From your findings in questions 1 and 2, indicate whether the yield for investment A is above or below 12%and whether that for investment B is above or below 16%. Explain.
2. Recognising that investment B is more risky than investment A, reassess the two alternatives, adding the 4% risk premium to the 12% discount rate for investment A and therefore applying a 16%
1. Assuming that investments A and B are equally risky and using the 12% discount rate, apply the present-value technique to assess the acceptability of each investment and to determine the preferred
P4.21 A company paid dividends of $1.00 per share in 2003, and just announced that it will pay$2.21 in 2010. Estimate the compound annual growth rate of the dividends.P4.22 A company reported net
P4.20 For each of the following streams of dividends, estimate the compound annual rate of 4 growth between the earliest year for which a value is given and 2011.
P4.19 Assume that an investment generates the following income stream and can be purchased at the beginning of 2011 for $1000 and sold at the end of 2017 for $1200. Estimate the yield for this
P4.18 Elliott Dumack must earn a minimum rate of return of 11% to be adequately compen- 4 sated for the risk of the following investment.
P4.17 Use a financial calculator or an Excel spreadsheet to estimate the yield for each of the two 4 investments given on page 115.
P4.15 Use a financial calculator or an Excel spreadsheet to estimate the yield for each of the 4 following investments.
P4.13 You invest $7000 in shares and receive $65, $70, $70 and $65 in dividends over the following four years. At the end of the four years, you sell the shares for $7900. What was the yield on this
P4.12 Assume you invest $5000 today in an investment that promises to return $9000 in exactly 10 years.a. Use the present-value technique to estimate the yield on this investment.b. If a minimum
P4.10 You are considering two investment alternatives. The first is a share that pays quarterly dividends of $0.50 per share and is trading at $25 per share; you expect to sell in six months for$27.
P4.9 Calculate the holding period return (HPR) for the two investment alternatives given on page 114. Which, if any, of the return components is likely not to be realised if you continue to hold each
P4.7 Given a real rate of interest of 3%, an expected inflation premium of 5%, and risk premiums for investments A and B of 3% and 5%, respectively, find the following.a. The risk-free rate of return
P4.5 Consider the historical data given in the accompanying table.a. Calculate the total return (in dollars) for each year.b. Indicate the level of return you would expect in 2012 and in 2013.c.
P4.3 Assuming you purchased a share for $50 one year ago, sold it today for $60, and during the year received three dividend payments totalling $2.70, calculate the following.a. Incomeb. Capital gain
P4.1 How much would an investor earn on a share purchased one year ago for $63 if it paid an annual cash dividend of $3.75 and had just been sold for $67.50? Would the investor have experienced a
Q4.4 Choose three ASX-listed shares and maintain a record of their dividend payments, if any, and closing prices each week over the next six weeks.a. At the end of the six-week period, calculate the
Q4.3 Access appropriate estimates of the expected inflation rate over the next year, and the current yield on one-year risk-free securities (the yield on these securities is referred to as the
Q4.2 Estimate the amount of cash you will need each year over the next 20 years to live at the standard you desire. Also estimate the rate of return you can reasonably expect to earn annually, on
Q4.1 Choose a publicly traded company that has been listed on the ASX for at least five years.Use any data source of your choice to find the annual cash dividend, if any, paid by the company in each
4.13 Describe the steps involved in the investment process. Be sure to mention how returns and risks can be evaluated together to determine acceptable investments.
4.12 Differentiate among the three basic risk preferences: risk-indifferent, risk-averse and riskseeking. Which of these behaviours best describes most investors?
4.10 Define and briefly discuss each of the following sources of risk.a. Business riskb. Financial riskc. Purchasing power riskd. Interest rate riske. Liquidity riskf. Tax risk g. Market risk h.
4.9 Define risk. Explain what we mean by the risk–return tradeoff. What happens to the required return as risk increases? Explain.
4.8 Explain how either the present value (of benefits versus cost) or the yield measure can be used to find a satisfactory investment. Given the following data, indicate which, if any,
4.7 Explain why you must earn 10% on all income received from an investment during its holding period in order for its yield actually to equal the 10% value you have calculated.
4.6 Define yield or internal rate of return and explain when it is appropriate to use yield rather than the HPR to measure the return on an investment.
4.5 What is meant by the holding period, and why is it advisable to use holding periods of equal length when comparing alternative investment vehicles? Define the holding period return (HPR) and
4.4 Define the following terms and explain how they are used to find the risk-free rate of return and the required rate of return for a given investment.a. Real rate of returnb. Expected inflation
4.3 What is a satisfactory investment? When the present value of benefits exceeds the cost of an investment, what can you conclude about the rate of return earned by the investor relative to the
4.2 What role do historical performance data play in estimating an investment’s expected return? Discuss the key factors affecting investment returns—internal characteristics and external forces.
4.1 Explain what is meant by the return on an investment. Differentiate between the two components of return—income and capital gains (or losses).
Understand the risk of a single asset, risk assessment, and the steps that combine return and risk.
Discuss the key sources of risk that might affect potential investment vehicles.
Explain the concept and the calculation of yield, and how to find growth rates.
Describe real, risk-free and required returns, and the calculation and application of holding period return yield (internal rate of return) and growth rates.
Discuss the role of time value of money in measuring return and defining a satisfactory investment.
Review the concept of return, its importance, the forces that affect the investor’s level of return, and historical returns.
3. Next, assume share J is back to its original level and share B increases by 10%. Recalculate the market averages on each of the three dates. Compare your findings in all three scenarios.Do you
2. The DJIA is the most widely cited sharemarket indicator, yet there are criticisms of the model. One criticism is that the higher-priced securities in the portfolio will impact the Dow more than
1. The divisor is 1.00 on 13 October 1977, 0.75 on 13 October 2007 and 0.85 on 13 October 2011. Using this information and the data supplied above, calculate the market average, using the same
5. Prepare a brief overview of the traditional and online sources of investment advice that could help Peter and Deborah create suitable portfolios. Which type of adviser would you recommend for
4. Peter mentioned to Deborah that he had read an article about day trading and wanted to try it. What would you advise Peter about the risks and rewards of this strategy?
3. Do you think that a broker that offers no online trading but focuses on personal attention would be a good choice for either Peter or Deborah?
2. What factors should Peter and Deborah consider before deciding to use a particular broker? Compare the pros and cons of getting the personal attention of a full-service broker with the services
1. Research at least four different full-service, discount and online stock brokerage companies, and compare the services and costs. What brokers would suit Peter’s needs best, and why? What
4. Give Ron a summary prescription for obtaining information and advice that will help to ensure the preservation and growth of the family’s newfound wealth.
3. Describe the services and sources of investment advice available to Ron. Would you recommend that he hire an adviser to manage the portfolio? Explain the potential costs and benefits of such an
2. Explain to Ron the need to find a good stockbroker and the role the stockbroker could play in providing information and advice.
1. Explain what role the Australian Financial Review, Smart Investor, Money and other publications might play in meeting Ron’s needs. What other general sources of economic and current event
P3.6 If you place a stop-loss order to sell at $2.30 on a share currently selling for $2.65 per share, what is likely to be the minimum loss you will experience on 500 shares if the share price
P3.5 Imagine that you have placed a limit order to buy 1000 shares of Sallisaw Tool at a price of $3.80, though the shares are currently selling for $4.10. Discuss the consequences, if any, of each
P3.4 Mamta Singh wishes to develop an average or index that can be used to measure the general behaviour of share prices over time. She has decided to include six closely followed, highquality shares
P3.3 The All Suspicious Index (a fictitious index) is used by many investors to monitor the general behaviour of the sharemarket. It has a base value set equal to 100 at 1 January 1980. The closing
Q3.8 Differentiate between the financial advice you would receive from a traditional investment adviser and one of the new online planning and advice sites. Which would you personally prefer to use,
Q3.7 Search for sites providing information about day trading. On the basis of your research, summarise how day trading works, some strategies for day traders, the risks and the rewards.What type of
Q3.6 Describe how, if at all, a conservative and an aggressive investor might use each of the following types of orders as part of their investment programs. Contrast these two types of investors in
Q3.5 Visit the websites of two brokerages listed in Table 3.1 or any others you know. After exploring the sites, compare them for ease of use, quality of information, availability of investing tools,
Q3.4 Prepare a checklist of questions and issues you would use when shopping for a stockbroker. Describe both the ideal broker and the ideal brokerage company, given your investment goals and
Q3.8 Differentiate between the financial advice you would receive from a traditional investment adviser and one of the new online planning and advice sites. Which would you personally prefer to use,
Q3.7 Search for sites providing information about day trading. On the basis of your research, summarise how day trading works, some strategies for day traders, the risks and the rewards.What type of
Q3.6 Describe how, if at all, a conservative and an aggressive investor might use each of the following types of orders as part of their investment programs. Contrast these two types of investors in
Q3.5 Visit the websites of two brokerages listed in Table 3.1 or any others you know. After exploring the sites, compare them for ease of use, quality of information, availability of investing tools,
Q3.4 Prepare a checklist of questions and issues you would use when shopping for a stockbroker. Describe both the ideal broker and the ideal brokerage company, given your investment goals and
Q3.3 Gather and evaluate relevant market averages and indices over the past six months to assess recent sharemarket conditions. Describe the conditions in these markets. Using recent history, coupled
Q3.2 Innovative Internet-based bookseller Amazon.com has now expanded into other retail categories. Gather appropriate information from relevant sources to assess the following with an eye towards
Q3.1 Thomas Weisel, chief executive of a securities company that bears his name, believes that individual investors already have too much information. ‘Many lose money by trading excessively on
3.23 What benefits does an investment club offer the small investor? Why do investment clubs regularly outperform the market and the professionals? Would you prefer to join a regular or an online
3.22 Describe the services that professional investment advisers perform, how they are regulated, online investment advisers and the cost of investment advice.
3.21 How are conciliation and arbitration procedures used to settle disputes between investors and stockbrokers?
3.20 What protection does the National Guarantee Fund (NGF) provide securities investors?
3.19 How can you avoid problems as an online trader?
3.18 Summarise the steps you would take to make an online share transaction. What is day trading, and why is it risky?
3.17 In what two ways are commissions typically charged by brokers for executing their clients’ transactions? Differentiate between the services and costs associated with fullservice, discount and
3.16 Differentiate among a market order, a limit order and a stop-loss order. What is the rationale for using a stop-loss order rather than a limit order?
3.15 Briefly differentiate among the following types of brokerage accounts:a. Single or jointb. Trusteec. Cashd. Margin
3.14 Describe the types of services offered by brokerage companies, and discuss the criteria for selecting a suitable stockbroker.
3.13 Discuss bond yields as they are related to assessing bond market conditions.
3.12 Briefly describe the calculation of the ASX All Ordinaries Share Price Index. Why should investors be careful when using indices?
3.11 Name three main sharemarket indices used in Australia. On what basis are shares chosen to be included in each index?
3.10 Describe the basic philosophy and use of sharemarket indices. Explain how the behaviour of an index can be used to classify general market conditions as bull or bear.
3.9 Using information in the text and the ASX and ASIC websites, describe some common types of online investment scams and hoaxes. How can you protect yourself from them?
3.7 How would you access each of the following types of information, and how would the content help you to make investment decisions?a. Prospectusesb. Back-office research reportsc. Investment
3.6 Briefly describe the types of information that the following resources provide.a. Shareholders’ reportb. Comparative data sources
3.5 What popular financial business periodicals would you use to follow the financial news?General news? Business news? Would you prefer to get your news from print sources or online, and why?
3.4 Differentiate between descriptive information and analytical information. How might one logically assess whether the acquisition of investment information or advice is economically justified?
3.2 Identify the main types of online investment tools. How can they help you to become a better investor?
3.1 Discuss the impact of the Internet on the individual investor, and summarise the types of resources it provides.

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