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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

9. Below are some actual reports on some companies’ quarterly results (as of January 25, 2011). Predict the subsequent change in each company’s stock price.
8. Assume that you went to a casino to play and began betting with $20. After a while, you won big (say $100). If you then continued playing, why would you have done that (ignore playing for pleasure
7. Suppose that you had examined the economic performance of a company over the last few years and observed that it earned large profits. Does this contradict the efficient market hypothesis?
6. Are continuous stock price movements following an announcement by a firm evidence of market inefficiency?
If you were a financial consultant, how would you advise your clients to fare during the current credit crisis? Would you invoke the EMH and/or behavioral finance?Discuss.
Standing under the museum’s famous blue whale exhibit, a behavioral finance expert discussed how to stay rational in the current market and discussed how emotions can impact such decision making.”
Many professionals are trying to counteract the trend. Investment firm Gerstein Fisher held a seminar at the Museum of Natural History Tuesday for 400 clients titled ‘Managing the Fight or Flight
“Rational or not, many investors say they have no choice but to bail. They are losing income elsewhere and can’t afford to risk more erosion of stocks and bonds.
5. The following sentences are from an article that appeared in the Wall Street Journal of November 24, 2008, titled “Fear and Frustration: Some Calling it Quits.”After you have read them, answer
4. What can the EMH and behaviorists say about the Internet bubble of the late 1990s and the subsequent stock market crash?
3. Assume that investors search for information about asset prices to determine if they are over- or undervalued. While searching for such mispriced stocks, they uncover information and quickly act
2. We discussed in the text that economists documented that the market generates systematic biases (such as overreactions) for winner or loser stocks. If investors were rational, what would
b. What would you advise Haris to do if he could finance the project and earn its net present value by borrowing from the bank? Could he increase his current level of satisfaction without sacrificing
a. If Haris declines to invest in the project, even though it has a net positive return, because he claims that the initial outlay of cash would reduce his current level of consumption, is his
1. Haris is pondering whether to invest in a new project that has a positive net return(net present value). He can borrow and lend from a bank at the risk-free rate (for simplicity also assume no
Understand the implications of behavioral finance for investors and investment strategies
Define the anomalies of market efficiency and their implications for trading ???? Know what behavioral finance is and why it is gaining popularity ????
Explain the impact of efficient markets on investment managers, investors, and asset pricing models ????
????Know what market efficiency is and its three forms ???? Understand the implications of efficient markets for investment strategies and analyses ????
d. Given that currently interest rates are near zero, what would than mean about reaching your desired financial goals in the future? In other words, if the interest(compounding) rate is low, what
c. During the third quarter of 2010, interest rates were at record lows. What risks were you facing with your savings or money market accounts?
b. Which issue (concern) would constrain investors from buying low and selling high?
10. Answer the following questions.a. What happens to an investor’s (degree of) risk tolerance during good economic times and bad economic times? What do you think happened during the recent
9. Along with the above question, why do you think that optimal risky portfolios may vary across investors?
8. We learned that portfolio managers can easily compute the optimal risky portfolio(and efficient frontier) for all investors. Thus they economize on administrative costs (savings that are passed on
Assume that you use the same weighting scheme as used in Table 8.1. Now you have the following information about your two risky assets, X and Y: E(rx) = 10%, E(ry) = 12%, 2 x = 200, and 2 y = 300.
d. Should one discard CAPM? In answering this question, read once again the box titled Lessons of Our Times. Is beta relevant in this case? Discuss.
c. Can you explain why Apple’s shares did not move as much as the market, and if so, what were investors reacting to?
stocks.
Which statement above implies “market risk” and “Apple’s average return”?
e. Related to part (d), if the investor has $100,000 to invest, what fraction of must he borrow (at the risk-free rate) to have a portfolio with an expected return of 15%?
d. What would be the investor’s optimal mix of risky portfolio and the risk-free rate so that he could have a portfolio with an expected return of 15%?
c. What expected return should the investor demand for a portfolio with standard deviation of 25%? Discuss the result.
b. Assume the investor requires a risk level for the portfolio of 14%. What fraction of assets should he invest in the optimal portfolio and what would be its expected return?
a. How much extra return does the investor want per unit of risk in order to invest in the risky asset?
1. Assume that you have the following hypothetical data on assets: the risk-free rate is 3%; the expected return on the investor’s optimal (tangency) portfolio is 10%;and the risk of the tangency
14. What is the difference between strategic asset allocation and tactical asset allocation?
13. Why aren’t you able to reduce risk further even if you add more stocks to your portfolio? Why does diversification eliminate firm-specific risk completely?
12. What are some of the dangers of asset allocation strategies? You may also want to read again the box titled International Focus.
11. Give an insightful interpretation of the capital market line and suggest an appropriate strategy for an investor.
10. Assume that you have a risky portfolio with an expected return of 10% and variance of 400. The Treasury bill is 5%. What would be that level of risk aversion that you make you select the risky
9. If you were presented with two investment opportunity sets with the following Sharpe ratios, 0.55 and 0.57, which one would you select and why?
8. What would happen to the expected return on a risky-asset portfolio if investors perceived an increase in the fluctuation (volatility) of risky assets?
b. What would be the new risk of your overall portfolio?
a. Now assume that you want to earn a specific (expected) return on your overall portfolio equal to 10%. What proportions on the risky assets and the risk-free asset would you apply?
7. Again, refer to the information on question 5 and answer the questions below.
6. Using the information from question 5, find your degree of risk aversion and the optimal percentage of funds allocated to the risky assets and the risk-free asset.
d. Now compute the slope of the capital allocation line and show your overall portfolio’s point on the line. Does it lie above, below, or on the line? Explain and prove why.
c. Graph your capital allocation line and show your risky portfolio’s point.
b. What would be the investment percentages of each risky asset in your overall portfolio, including the allocation to the Treasury bill? What is the total allocation of assets in your overall
a. If you want to allocate $700 to the risky assets, what would be the expected return and risk of your overall portfolio?
5. Assume that you have the following information for making an investment decision.You have created a portfolio of risky assets with an expected return of 15%and risk of 20%. The risk-free rate,
c. What is the relationship between risk tolerance and risk premium? What do you conclude from your exercise?
b. Find the risk aversion value if the risk premium was 0.06.
a. What would be a guess of the portfolio’s (expected) risk premium?
4. Assume that you expect the standard deviation of a stock portfolio to be 0.15 next year and you have a risk aversion of 4 (A = 4).
e. Finally, graph the capital allocation line (CAL) and discuss its shape.
d. Assume that the risk-free rate is 0.08%, on average, during that period. Assume that you place 30% of your funds in T bills. Compute your overall portfolio’s return and risk and interpret the
c. Form a two-stock portfolio and compute its rate of return and risk (for risk, compute a new column of returns found by averaging the daily returns of each stock, since you assume equal weights,
b. Compute the covariance and correlation between the two stocks and interpret the values.
a. Compute the rates of return, variances, and standard deviations of each stock and interpret their values.
3. Collect data on the closing stock prices of Alcoa (AA) and IBM (IBM) for the last 3 months (a possible source is Yahoo! Finance). Input them in EXCEL and do the following analyses (you might also
e. What is the meaning of “sleeping well while eating well”?
d. What are some of the lessons investors learned from the recent financial experience?
c. What is the impact on assets (and financial markets) or investors becoming more risk-averse?
b. Why is attention to your asset allocation set up (strategy) still important?
a. Explain the pros and cons of diversification between safe assets and risky assets.
2. After reading the article titled An Ugly Market’s Lessons for Investors, by S. Anano, which appeared the Wall Street Journal of October 5, 2008, answer the following questions.
c. Why are commodities a good candidate asset class to be part of a diversified portfolio?
b. Do these relationships among various different assets hold forever? Why or why not. Explain.
a. Why do investors examine the relationships among alternative investment assets before including them in their portfolios?
1. After reading the article titled Commodities Zig. Stocks Do, Too, by C. Cui, which appeared in the Wall Street Journal of October 17, 2008, answer the following questions.
what is the
4. Finally, once the list is complete, disclose this information (when needed) to all involved parties like shareholders, regulators, and academicians. Update the information periodically as
3. Compile both direct and indirect risks of these instruments and by institutions that own them.
2. Compute the direct and indirect exposures of each of these instruments for all parties involved.
1. Make an inventory of all above-mentioned instruments and list the assets and the liabilities of each one of them.
12. A fund of funds is a mutual fund that invests in other mutual funds. In this way, the investors in the original fund get better diversification and better asset allocation among investment
11. Assume that a fund holds the following assets:A: 100,000 shares at $25 each B: 50,000 shares at $10 each C: 25,000 shares at $20 each If the fund’s manager sells all of asset C and replaces it
10. If you want to effectively accomplish asset allocation, what is an easy and cheap way to do that? Explain.
9. Explain why index funds have lower costs than traditional mutual funds.
8. A fund started the year with a NAV of $10.60 and ended the year with a NAV of$9.50. During the year, the fund distributed $1.10 in the form of income and capital gains. If you were an investor in
7. Assume the following information on a mutual fund: assets: $3 million; liabilities:$500,000; number of shares outstanding: 1,500,000. Compute the fund’s NAV.
f. Overall, on the basis of this passage, what steps would you be wise to take before investing in ETFs?
e. What is the role of a “price limit” as opposed to a “market order” in an ETF?
d. What happens to the spreads of ETFs during up markets and during down markets? What impact would that have on the investor?
c. Why do you need to keep an eye on an ETF’s net asset value (NAV) throughout the day but not so for a traditional mutual fund?
b. Why are some ETFs preferable to others?
. What are the differences between ETFs and traditional mutual funds?
5. Answer the following questions based on the passage below:Some trading advantages of EFTs include the ability of an investor to trade an ETF immediately at any point in time during trading hours,
e. How are such funds riding through the current credit crisis? In other words, what kinds of practices do they apply?
d. Why do shares in closed-end funds trade at a discount from par?
c. When, in general, do IPOs happen in the economy?
b. What type of investors are drawn to such funds and why?
a. What kinds of problems do closed-end mutual funds currently face?
4. Search recent issues of the Wall Street Journal and answer the following questions:
3. What are the differences between mutual funds and hedge funds?
2. What are the advantages and disadvantages of passively managed funds over actively managed funds?
1. You want to decide between two mutual funds that track a market index, say the S&P 500, and you see than one fund manages $100 million in assets while the other manages $400 million. Which factors
13. Can you advance an argument or two as to why the Fed might be willing to pay interest on banks’ short-term deposits at the Fed?

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