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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

LG3 Describe the commodities segment of the futures market and the basic characteristics of these investment vehicles.
LG2 Explain the role that hedgers and speculators play in the futures market, including how profits are made and lost.
LG1 Describe the essential features of a futures contract, and explain how the futures market operates.
LG6 Describe market index options, puts and calls on foreign currencies, and LEAPS and discuss how these securities can be used by investors.
LG5 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.
LG4 Describe the profit potential of puts and calls and note some popular put and call investment strategies.
LG3 Explain how put and call options are valued and the forces that drive options prices in the marketplace.
LG2 Describe the options market and note key options provisions, including strike prices and expiration dates.
LG1 Discuss the basic nature of options in general and puts and calls in particular and understand how these investment vehicles work.
LG6 Explain the role of limit and stop-loss orders in investment timing, warehousing liquidity, and timing investment sales.
LG5 Describe the role and logic of dollar-cost averaging, constant-dollar plans, constant-ratio plans, and variable-ratio plans.
LG4 Use the Sharpe, Treynor, and Jensen measures to compare a portfolio's return with a risk-adjusted, market-adjusted rate of return, and discuss portfolio revision.
LG3 Understand the techniques used to measure income, capital gains, and total portfolio return.
LG2 Discuss the data and indexes needed to measure and compare investment performance.
LG1 Explain how to use an asset allocation scheme to construct a portfolio consistent with investor objectives.
LG6 Identify the sources of return and compute the rate of return earned on a mutual fund investment.
LG5 Describe the investor uses of mutual funds along with the variables to consider when assessing and selecting funds for investment purposes.
LG4 Discuss the investor services offered by mutual funds and how these services can fit into an investment program.
LG3 Discuss the types of funds available and the variety of investment objectives these funds seek to fulfill.
LG2 Distinguish between open- and closed-end funds, as well as other types of professionally managed investment companies, and discuss the various types of fund loads, fees, and charges.
LG1 Describe the basic features of mutual funds and note what they have to offer as investments.
LG6 Discuss various bond investment strategies and the different ways these securities can be used by investors.
LG5 Understand the basic concept of duration, how it can be measured, and its use in the management of bond portfolios.
LG4 Describe the various measures of yield and return and explain how these standards of performance are used in bond valuation.
LG3 Understand how bonds are valued in the marketplace.
LG2 Describe the term structure of interest rates and note how yield curves can be used by investors.
LG1 Explain the behavior of market interest rates and identify the forces that cause interest rates to change.
LG6 Describe the basic features and characteristics of convertible securities, and measure the value of a convertible.
LG5 Discuss the global nature of the bond market and the difference between dollar-denominated and non- dollar-denominated foreign bonds.
LG4 Identify the different types of bonds and the kinds of investment objectives these securities can fulfill.
LG3 Explain how bonds are priced in the market and why some bonds are more volatile than others.
LG2 Describe the essential features of a bond, note the role that bond ratings play in the market, and distinguish among different types of call, refunding, and sinking-fund provisions.
LG1 Explain the basic investment attributes of bonds and their use as investment vehicles.
P9.12 Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do
P9.11 Brett Daly is an active stock trader and an avid market technician. He got into technical analysis about 10 years ago, and although he now uses the Internet for much of his analytical work, he
P9.10 You find the closing prices for a stock you own. You want to use a 10-day moving average to monitor the stock. Calculate the 10-day moving average for days 11 through 20. Based on the data in
P9.9 You are presented with the following data: Week Most recent 2 3 4 5 Mutual Fund Cash Position $281,478,000.00 258,500,000.00 234,800,000.00 211,950,000.00 188,480,000.00 Mutual Fund Total Assets
P9.8 You have collected the following NH-NL indicator data: Day 1 (yesterday) NH-NL Indicator 100 2345678 2 95 3 61 43 -15 -45 -82 8 -86 9 -92 10 -71 If you are a technician following a
P9.7 You are given the following information: Day New Highs New Lows 1 (yesterday) 117 22 2 95 34 34567810 84 41 64 79 53 98 19 101 19 105 18 110 9 19 90 22 88a. Calculate the 10-day moving average
P9.6 At the end of a trading day you find that, on the NYSE, 2,200 stocks advanced, and 1,000 stocks declined. What is the value of the advance-decline line for that day?
P9.5 You hear a market analyst on television say that the advance/decline ratio for the session was 1.2. What does that mean?
P9.4 Below are figures representing the number of stocks making new highs and new lows for each month over a six-month period: Month New Highs New Lows July 117 22 August 95 34 September 84 41
P9.3 Compute the level of on-balance volume (OBV) for the following three-day period for a stock, if the beginning level of OBV is 50,000 and the stock closed yesterday at $25. Day Closing Price
P9.2 Listed below are data that pertain to the corporate bond market. (Note: Each "period" below covers a span of 6 months.) Period 1 Period 2 Period 3 Period 4 Average yield on 10 high-grade 5.30%
P9.1 Compute the Arms index for the S&P 500 over the following three days: Volume for Stocks Volume for Stocks Number of Stocks Day Rising in Price 123 350 2 3 275 260 Number of Stocks Falling in
Q9.6 Briefly define each of the following and note the conditions that would suggest the market is technically strong.a. Breadth of the marketb. Short interestc. Relative strength index (RSI)d.
Q9.5 Describe each of the following approaches to technical analysis and note how it would be used by investors.a. Confidence indexb. Arms indexc. Trading actiond. Odd-lot tradinge. Chartingf. Moving
Q9.4 Briefly describe how technical analysis is used as part of the stock valuation process. What role does it play in an investor's decision to buy or sell a stock?
Q9.3 Describe how representativeness may lead to biases in stock valuation.
Q9.2 Briefly define each of the following terms and describe how it can affect investors' decisions:a. Loss aversionb. Representativenessc. Narrow framingd. Overconfidencee. Biased self-attribution
Q9.1 Much has been written about the concept of an efficient market. It's probably safe to say that some of your classmates believe the markets are efficient and others believe they are not. Have a
9.11 What is a stock chart? What kind of information can be put on charts, and what is the pur- pose of charting?a. What is the difference between a bar chart and a point-and-figure chart?b. What are
9.10 Briefly describe each of the following and note how it is computed and how it is used by technicians:a. Advance-decline lines.b. Arms indexc. On-balance volume.d. Relative strength Index. e
9.9 Briefly describe each of the following and explain how it is used in technical analysis:a. Breadth of the marketb. Short interestc. Odd-lot trading
9.8 What is the Dow theory, and how is it used to analyze the market? Describe the confidence index, and note the feature that makes it unique.
9.7 Can the market really have a measurable effect on the price behavior of individual secur ties? Explain
9.6 What is the purpose of technical analysis? Explain how and why it is used by technicians; note how it can be helpful in timing investment decisions.
9.5 Briefly explain how behavioral finance can affect each of the following:a. The trading activity of investors.b. The tendency of value stocks to outperform growth stocks.c. The tendency of stock
9.4 How can behavioral finance have any bearing on investor returns? Do supporters of behavioral finance believe in efficient markets? Explain.
9.3a. Does this mean that high rates of return are not available in the stock market?b. How can an investor earn a high rate of return in an efficient market? What are market anomalies and how do
9.2 Explain why it is difficult, if not impossible, to consistently outperform an efficient market.
9.1 What is the random walk hypothesis, and how does it apply to stocks? What is an efficient market? How can a market be efficient if its prices behave in a random fashion?
LG6 Compute and use technical trading rules for individual stocks and the market as a whole.
LG5 Describe some of the approaches to technical analysis, including, among others, the Dow theory, moving averages, charting. and various indicators of the technical condition of the market.
LG4 Discuss the purpose of technical analysis and explain why the performance of the market is important to stock valuation.
LG3 Explain how behavioral finance links market anomalies to investors' cognitive biases.
LG2 List four "decision traps" that may lead investors to make systematic errors in their investment decisions.
LG1 Describe the characteristics of an efficient market, explain what market anomalies are, and note some of the challenges that investors face when markets are efficient.
P8.29 At the beginning of this chapter you read about a 2009 earnings announcement from Winn- Dixie in which earnings per share were reported as $0.17 for the quarter. Let's make a simple assumption
P8.27 Fundamental to the valuation process is the determination of the intrinsic value of a security, where an investor calculates the present value of the expected future cash benefits of the
P8.26 Marc Dodier is a recent university graduate and a security analyst with the Kansas City bro- kerage firm of Lippman, Brickbats, and Shaft. Dodier has been following one of the hottest issues on
P8.25 Chris Norton is a young Hollywood writer who is well on his way to television superstardom. After writing several successful television specials, he was recently named the head writer for one
P8.24 World Wide Web Wares (4W, for short) is an online retailer of small kitchen appliances and utensils. The firm has been around for a few years and has created a nice market niche for itself. In
P8.23 Newco is a young company that has yet to make a profit. You are trying to place a value on the stock, but it pays no dividends and you obviously cannot calculate a P/E ratio. As a result, you
P8.22 AviBank Plastics generated an EPS of $2.75 over the last 12 months. The company's earn- ings are expected to grow by 25% next year, and because there will be no significant change in the number
P8.21 You're thinking about buying some stock in Affiliated Computer Corporation and want to use the P/E approach to value the shares. You've estimated that next year's earnings should come in at
P8.20 Assume you obtain the following information about a certain company: Total assets $50,000,000 Total equity Net income EPS $25,000,000 $3,750,000 $5.00 per share Dividend payout ratio 40%
P8.19 Consolidated Software doesn't currently pay any dividends but is expected to start doing so in four years. That is, Consolidated will go three more years without paying any dividends, and then
P8.18 Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for your- self
P8.17 A particular company currently has sales of $250 million; sales are expected to grow by 20% next year (year 1). For the year after next (year 2), the growth rate in sales is expected to equal
P8.16 New Millennium Company's stock sells at a P/E ratio of 21 times earnings. It is expected to pay dividends of $2 per share in each of the next five years and to generate an EPS of $5 in year 5.
P8.15 Assume there are three companies that in the past year paid exactly the same annual div- idend of $2.25 a share. In addition, the future annual rate of growth in dividends for each of the three
P8.14 This year, Shoreline Light and Gas (SL&G) paid its stockholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G stating that, in its opinion, the
P8.13 The price of Consolidated Everything is now $75. The company pays no dividends. Ms. Bossard expects the price three years from now to be $100 per share. Should Ms. B. buy Consolidated E. if she
P8.12 Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual divi- dends of $2.50 a
P8.11 Assume you've generated the following information about the stock of Bufford's Burger Barns: The company's latest dividends of $4 a share are expected to grow to $4.32 next year, to $4.67 the
P8.10 Larry, Moe, and Curley are brothers. They're all serious investors, but each has a different approach to valuing stocks. Larry, the oldest, likes to use a one-year holding period to value
P8.9 Danny is considering a stock purchase. The stock pays constant annual dividend of $2.00 per share, and is currently trading at $20. Danny's required rate of return for this stock is 12%. Should
P8.8 Amalgamated Aircraft Parts, Inc., is expected to pay a dividend of $1.50 in the coming year. The required rate of return is 16%, and dividends are expected to grow at 7% per year. Using the
P8.7 Melissa Popp is thinking about buying some shares of Education, Inc., at $50 per share. She expects the price of the stock to rise to $75 over the next three years. During that time she also
P8.6 Last year, InDebt Company paid $75 million of interest expense, and its average rate of interest for the year was 10%. The company's ROE is 15%, and it pays no dividends. Estimate next year's
P8.5 HighTeck has an ROE of 15%. Its earnings per share are $2.00, and its dividends per share are $0.20. Estimate HighTeck's growth rate.
P8.4 Goodstuff Corporation has total equity of $500 million and 100 million shares out- standing. Its ROE is 15%. The dividend payout ratio is 33.3%. Calculate the company's divi- dends per share
P8.3 Goodstuff Corporation has total equity of $500 million and 100 million shares out- standing. Its ROE is 15%. Calculate the company's EPS.
P8.2 GrowthCo had sales of $55 million in 2008, and is expected to have sales of $83,650,000 for 2011. The company's net profit margin was 5% in 2008, and is expected to increase to 8% by 2011.
P8.1 An investor estimates that next year's sales for New World Products should amount to about $75 million. The company has 2.5 million shares outstanding, generates a net profit margin of about 5%,
Q8.4 Assume an investor uses the constant-growth DVM to value a stock. Listed below are var- ious situations that could affect the computed value of a stock. Look at each one of these indi- vidually
Q8.3 Explain the role that the future plays in the stock valuation process. Why not just base the valuation on historical information? Explain how the intrinsic value of a stock is related to its
Q8.2 In this chapter, we examined nine different stock valuation procedures: Zero-growth DVM Constant-growth DVM Variable-growth DVM Dividends-and-carnings (D&E) approach Expected return (IRR)
Q8.1 Using the resources available at your campus or public library, select a company from Value Line that would be of interest to you. (Hint: Pick a company that's been publicly traded for at least

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