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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

9. Explain what performance attribution analysis entails.
What would be the (predicted) total return on the bond investment during the 3-year investment horizon?
Assume that the portfolio manager predicts that this (7-year, at that time) bond will sell so that it yields 4% and that the coupon income from the bond will have to be reinvested at 4%.
8. Assume that a portfolio manager has a 3-year investment horizon. Currently a 10-year bond offers a 5% coupon rate and sells that so it yields (to maturity) 4%.
For example, a “core” asset allocation, like an investment-grade bond composition, is implemented with bond ETFs, while managers are used for “satellite” investments for that portion of
7. You read in the financial press that some ETFs take the form of “core/satellite”investment management of a bond portfolio.
ABC Capital Management LLC considers increasing the allocation of corporate bonds in its fixed-income portfolio over the next 6 months. The manager plans to purchase AA or better grade corporates in
6. Read the passage below from the financial press and answer the following question:what types of active bond portfolio strategies is the company employing, and why?
5. Explain the difference between enhanced indexing and active investment management.
. Describe how you can manage interest rate risk with a ladders and barbells.
What if they expected the yield curve to pivot (not shift)?
3. If portfolio managers expect interest rates to change, which active strategy would they employ in managing their portfolios?
2. What are some of the factors that could change yields among bonds? If you expect a spread to be (abnormally) high, would you trade to take advantage of such a high spread? What are some of the
. Explain the pros and cons of the buy-and-hold strategy. In other words, comment on the composition of securities and their characteristics in the portfolio, expenses, and interest rate environment.
increase reflects the expansion of capital markets to embrace more marginal firms. (The Economist, Feb. 26, 2009)
The share of junk-bond issuers in the corporate-bond market had risen from a low of 28% in 1992. Most of the increase in junk issuance was in the B category.
c. Just under half of corporate debt in America was rated as “speculative” (BB or below) at the end of last year, according to Standard & Poor’s, a rating agency.
b. Treasuries fell across the board as investors cut bond holdings ahead of next week’s auctions after the government reported fewer job losses for March than forecast. (Wall Street Journal, April
3. What is the meaning of the last sentence of the above passage?
2. Why did the yield on the 10-year benchmark gilt increase?
1. What is the interpretation of the inability of the auction to attract investors?
a. A UK bond auction struggled to attract investors on Thursday amid further signs of strains in the gilts market because of the record amount of debt taken on by the government to revive the
7. Read the following statements, taken from various financial newspapers, and answer the question(s) below each statement:
6. Assume a shift in the yield curve, steeper today than it was a couple of days ago. If a company issues new bonds today, would its bonds sell for higher or lower prices than if it had issued the
Do you agree with these analysts’ conclusion if this economic scenario materializes? Explain.
5. Analysts suggest that a major economic expansion will favorably affect the prices of fixed-rate bonds, because the credit risk of bonds will decline as corporations realize better performance.
. Is the price of a long-term bond more or less sensitive to a change in interest rates than the price of a short-term security? If so, why?
3. Assume the following information for an existing zero-coupon bond: a par value of $10,000, maturity of 3 years, with a required rate of return of 12%. How much should investors be willing to pay
c. Illustrate these results with a graph.
b. Calculate the value of the bond 2 years after the bond was issued, assuming that market interest rates rise to 8%.
2. Assume a bond with the following data: a coupon rate of 8%, maturity of 10 years, making semiannual payments.a. Calculate the value of the bond 1 year later, assuming that market interest rates
. Compute the rate of return of the bond during this 1-year holding period.
b. Calculate the value of the bond 2 years after the bond was issued, assuming that market interest rates remained the same.
market interest rates remained the same.
1. Assume a bond with the following data: a coupon rate of 6%, maturity of 10 years, making semiannual payments.
Compute the stock’s holding period return. If the stock is expected to yield 15%, would you buy or sell the stock? Explain.
12. Assume the following hypothetical information on a stock:D0 = $1.00 g = 5% P0 = $45 P1 = $50
Compute the company’s book (BV), price-to-book (P/B), price-to-sales (P/S), and price-earnings (P/E) values.
11. You are given the following hypothetical information on a company:Total assets $100,000,000 Total liabilities $70,000,000 Total stockholder equity $30,000,000 No. of shares outstanding 10
10. If the intrinsic value of a stock exceeds the market price of the stock, is the stock over- or undervalued? Explain.
9. Use the information on the stock above to compute an estimate of its current price. Assume further that the stock’s expected dividend is $1.50 and the growth rate of dividends is 3.4%.
a 10% rate of return, is the stock over- or undervalued? Should the investor buy, hold, or sell the stock?
c. If, upon further analysis, an investor finds that the stock is expected to provide
b. What is the implied expected return on the market?
a. What are the stock’s expected and required rates of return (assuming equilibrium conditions)?
8. Assume that a stock has a beta coefficient of 1.2, the risk-free rate is 3%, and the market risk premium is 7%. Answer the questions below.
If the stock is expected to give a rate of return of 11%, what action should the investor take? What should happen if the stock’s expected rate of return is exactly 10%?
7. Suppose that an investor was considering whether to keep a stock in her portfolio, buy more of it, or sell it. The investor required a 10% rate of return from that stock.
6. If a stock’s dividend growth rate is expected to be zero forever, what would be the stock price if the dividend was $1 and the firm had a required rate of return of 10%?
. Assume that the market yields 10% and the dividend yield of an average-risk stock is 5%, what would be the market’s consensus forecast for the rate of growth(appreciation) on that stock’s price?
c. What would happen to P/E if rr increased? What is the implicit assumption in this case? Explain.
b. What would happen to the company’s P/E ratio if the ROE decreased to 25%?Explain.
a. Compute the company’s retention ratio (rr).
4. An investor has the following information about a company: P0 = $43, EPS =$3.00, k = 12%, and ROE = 29%
f. Given that the S&P 500 Index returned −1.97% during the year from March 2008 to March 2009 (according to Yahoo! Finance) and the 10-year Treasury bond (alternative proxy for the risk-free rate)
e. Using an alternative methodology, can you derive Coca Cola’s current (2008)stock price? (Hint: Multiply EPS by the P/E ratio.)
. Using Eq. 11, recompute the firm’s required rate of return (Hints: Compute the growth rate of dividends for years 2007 and 2008 and then determine the 2008 price using Eq.10. Use an average price
c. Using the current stock price and expected dividend figure, verify that the stock’s dividend yield is 3.8%.
b. Based on the above information and the company’s current stock price, derive the firm’s required rate of return.
a. From the data on dividends (past, for 2008, and expected, for 2009), derive the dividend growth rate.
Based on the information below on the Coca Cola Company (obtained from Value Line online), answer the following questions.Data for Coca-Cola:D2007 = $1.36; D2008 = $1.52; D2009 = $1.64; P2008 =
c. Should long-term investors fear volatility of the stock market? Explain.
. Should investors listen to “market experts” on buy/sell recommendations or should they engage in sound stock-trading activities? Discuss.
a. When would buying a stock not be prudent?
ut what is a hot stock, anyway? Why is he telling me that? Doesn’t he tell the same thing to his other clients? Am I so special?
My adviser also tells me that when investors are frightened, that is the good time to buy. Sometimes, however, he tries to sell me a “hot stock.” Should I believe him and follow his
2. Based on the following paragraph, answer the questions that follow.“The time to buy stocks is when blood is running in the streets,” said one famous investor in the early nineteenth century.
. If you engage in stock-picking activities, what would be the counterargument for stock investments? What are the advantages and disadvantages of each approach?
c. What is the purpose of individual stock picking, based on information contained in this chapter?
b. What are the pros and cons of owning a stock (or a small number of them) and investing in a stock mutual fund (such as an index fund)? Which approach is preferred and why?
a. Can you devise a “good time” to sell a stock, according to your beliefs?
Am I better at picking winning stocks than other people, even professional managers? Finally, what do I believe about the market if I decide to build a stock portfolio and not simply go with the
Can I beat the market with my stock portfolio? Besides, how do I know that I have picked the right (i.e., undervalued)stocks in my homemade portfolio?
I think that a single stock or a portfolio is riskier (than the index of stocks) and it involves considerable time and effort (as well as money) to keep track of it.
Should I hold onto the stock hoping that it will quickly rebound? Should I sell it and invest the proceeds in another instrument such as a mutual fund? An index fund may do better than a single
1. Based on the following paragraph, answer the questions that follow.I am upset that my favorite stock, which I owned for a very long time, has decreased in value. If its price continues to fall, I
3. If the stock’s expected return is the same as the stock’s required return, buy or hold the stock.
2. If the stock’s expected return is less than the stock’s required return, sell the stock(or sell the stock short).
1. If the stock’s expected return is greater than the stock’s required return, buy the stock.
Compute a stock’s expected and required rates of return and interpret them ???? Value a stock using several methods ???? Use and interpret several relative equity valuation measures ???? Know
12. How can you, the retail investor, apply active portfolio management and what practical issues could you face in doing so?????
11. Search the Wall Street Journal to find articles on stock-split announcements and follow the path of the firm’s stock price. What do you see?
. Scour the Wall Street Journal to find articles on the issue of foreign governments(such as China) holding US dollars and how this situation sparks heated debates on the US budget and trade deficits.
9. How is the CAPM related to the business cycle?
8. What is the relevance of monetary policy to investment management?
7. Explain the effect on the price level and output of an economy when there is an increase in investment within the economy.
6. Why should investors worry about federal budget deficits and trade deficits?
5. How can an investment practitioner use the information contained in the economic indicators?
4. Propose a policy for an overheating economy and a contracting economy. Include both economic policies in your discussion.
3. Explain the link or the chain of events from a falling (value of the) dollar to business investment spending.
2. If a particular sector in the economy is expected to grow faster and generate higher cash flows than other sectors, what impact would that have on analysts’perceptions about the sector and its
1. If an investment professional approached you and began telling you a story about how good (or hot) certain stocks were and would be, hoping to entice you to purchase them for your portfolio, that
Do risk factors change from one industry to another and over time?
Do industries (and their firms) exhibit consistent performance over time? ????
Do returns in industries vary and, if so, do they move together or opposite to each other? ????
11. Assume that you have estimated the following (market) model for a stock x:
10. What are the implications for technical analysis under the theory of behavioral finance?
c. After the bell, American Express reported earnings a hair short of analysts’estimates.
b. Verizon’s earnings missed by a penny and revenue fell from a year earlier.
a. Before the opening bell, DuPont reported results that beat expectations.

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