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investment analysis portfolio

Questions and Answers of Investment Analysis Portfolio

What would you look for to justify a price/book value ratio of 3.0? What would you expect to be the characteristics of a firm with a P/BV ratio of 0.6?
What is the rationale for using the price/book value ratio as a measure of relative value?
Under what conditions would you use a two- or threestage cash flow model rather than the constant-growth model?
Discuss a company that is known to be a low-cost producer in its industry and consider why it is a cost leader.Do the same for a firm known for differentiating.
Select a company outside the retail drugstore industry and, based on reading its annual report and other public information, discuss what you perceive to be its competitive strategy (i.e., low-cost
Select a company outside the retail drugstore industry and indicate what industry series you would use in an industry analysis. (Use one of the industry groups designated by Standard & Poor’s.)
Select a company outside the retail drugstore industry and indicate what economic series you would use for a sales projection. Discuss why this is a relevant series.
A biotechnology firm is growing at a compound rate of more than 21% a year. (Its ROE is over 30%, and it retains about 70% of its earnings.) The stock of this company is priced at about 65 times next
Give an example of a cyclical stock and discuss why you have designated it as such. Is it issued by a cyclical company?
Give an example of a growth company and discuss why you identify it as such. Based on its P/E, do you think it is a growth stock? Explain.
Further to the previous question, do you think the framework is general enough to be applied to any industry, or do you have any suggestions to improve it?
Apply the competitive forces analysis (Exhibit 8.14) to a Canadian resource-based industry, a manufacturing industry, and a service industry of your choice.
If you were convinced that an energy break point(Exhibit 8.13) is coming within three years, how would you advise your client to act to take advantage of this.Make a list of companies that you might
Could the Energy Evolution Cycle (Exhibit 8.13) be applied to any other industry? For instance, would you be able to modify the chart such that it might be applicable to another resource-based
Based on the Energy Evolution Cycle (Exhibit 8.13), which stage in the cycle do you think the global energy industry is at currently? Are we getting closer or moving further from a break point?
You know the following about your industry (I) and the market (M):ROEI: 12% ROEM: 16%RRI: 0.60 RRM: 0.55 BetaI: 1.05 BetaM: 1.00 Discuss what difference you would expect in the P/Es, and explain why
Evaluate your industry in terms of the five factors that determine an industry’s intensity of competition. Based on this analysis, what are your expectations about the industry’s profitability in
Prepare a table showing the percentage change for each of the last 10 years in (a) the Consumer Price Index (all items), (b) nominal GDP, (c) real GDP (in constant dollars), and (d) the GDP deflator.
Give an example of an industry in Stage 2 of the industrial life cycle. Discuss your reasoning for putting the industry in Stage 2 and any evidence that caused you to select this stage for the
Discuss at what stage in the industrial life cycle you would like to discover an industry. Justify your decision.
Assume the industry you are analyzing is in the fourth stage of the industrial life cycle. How would you react if your industry-economic analysis predicted that sales per share for this industry
An investor is convinced that the stock market will experience a substantial increase next year because corporate earnings are expected to rise by at least 12%. Do you agree or disagree? Why or why
Some observers contend that it is harder to estimate the effect of a change in interest rates on common stocks than on bonds. Discuss this contention.
The current rate of inflation is 3%, and long-term Treasury bonds are yielding 7%.You estimate that the rate of inflation will increase to 6%.What do you expect to happen to long-term bond yields?
You are informed of the following estimates: Nominal money supply is expected to grow at a rate of 7%, and GDP is estimated to grow at 4%. Explain what you think will happen to stock prices during
Explain the following statements: (a) There is a strong, consistent relationship between money supply changes and stock prices. (b) Money supply changes cannot be used to predict stock price
At a lunch with some business associates, you discuss the reason for the relationship between the economy and the stock market. One of your associates contends that she has heard that stock prices
Why would you expect a relationship between economic activity and stock price movements?
Discuss why you would not expect all industries to have a similar relationship to the economy. Give an example of two industries that have different relationships to the economy.
What is the benefit of analyzing the market and alternative industries before individual securities?
Discuss the difference between the top-down and bottom-up approaches.What is the major assumption that causes the difference in these two approaches?
Suppose you are considering the purchase of shares in the XYZ mutual fund. As part of your investment analysis, you regress XYZ’s monthly returns for the past five years against the three factors
Some studies related to the efficient market hypothesis generated results that implied additional factors beyond beta should be considered to estimate expected returns.What are these other variables
According to the CAPM, what assets are included in the market portfolio, and what are the relative weightings? In empirical studies of the CAPM, what are the typical proxies used for the market
Draw an ideal SML. Based on the early empirical results, what did the actual risk-return relationship look like relative to the ideal relationship implied by the CAPM?
What are the similarities and differences between the CML and SML as models of the risk-return trade-off?
The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security.Which is the relevant risk variable and why is it relevant? Why is the other
What changes would you expect in the standard deviation for a portfolio of between 4 and 10 stocks, between 10 and 20 stocks, and between 50 and 100 stocks?
Draw a graph that shows what happens to the Markowitz efficient frontier when you combine a risk-free asset with alternative risky asset portfolios on the Markowitz efficient frontier. Explain why
The standard deviation of Shamrock Corp. stock is 19%.The standard deviation of Sophie Co. stock is 14%.The covariance between these two stocks is 100.What is the correlation between Shamrock and
The following are monthly percentage price changes for four market indices.S&P Russell Month DJIA 500 2000 Nikkei 1 0.03 0.02 0.04 0.04 2 0.07 0.06 0.10 0.02 3 0.02 0.01 0.04 0.07 4 0.01 0.03
Given: E(R1) 0.12 E(R2) 0.16 E(1) 0.04 E(2) 0.06 Calculate the expected returns and expected standard deviations of a two-stock portfolio having a covariance of 0.70 under the following
Given: E(R1) 0.10 E(R2) 0.15 E(1) 0.03 E(2) 0.05 Calculate the expected returns and expected standard deviations of a two-stock portfolio in which Stock 1 has a weight of 60% under the
You are considering two assets with the following characteristics.E(R1) 0.15 E(1) 0.10 w1 0.5 E(R2) 0.20 E(2) 0.20 w2 0.5 Compute the mean and standard deviation of two portfolios if
The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a sixmonth period.Month Madison Cookies Sophie Electric 1 0.04 0.07 2 0.06 0.02 3 0.07 0.10 4 0.12
Given the following market values of stocks in your portfolio and their expected rates of return, what is the expected rate of return for your common stock portfolio?Stock Market Value ($Mil.)
Considering the world economic outlook for the coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range
Stocks K, L, and M each have the same expected return and standard deviation.The correlation coefficients between each pair of these stocks are:K and L correlation coefficient 0.8 K and M
Draw a hypothetical graph of an efficient frontier of Canadian common stocks. On the same graph, draw an efficient frontier assuming the inclusion of Canadian bonds as well. Finally, on the same
At a social gathering, you meet a portfolio manager for a mutual fund company. He confides to you that he has been following the recommendations of six analysts for an extended period and has found
Why do the advocates of behavioural finance contend that the standard finance theory is incomplete?
Describe the general goal of behavioural finance.
You are given the following long-run annual returns for alternative investments:Government of Canada T-bills 3.50%Large-cap common stock 11.75%Long-term corporate bonds 5.50%Long-term government
Using published sources (for example, the FP Infomart, Barron’s, Bank of Canada), look up the exchange rate for Canadian dollars with Japanese yen for each of the past 10 years (you can use an
Using a recent edition of Barron’s, examine the weekly percentage change in the stock price indices for Japan, Germany, United Kingdom, the United States, and Canada. For each of three weeks, which
Using a source of international statistics, compare the percentage change in the following economic data for Japan, Germany, the United States, and Canada for a recent year.What were the differences,
You have a fairly large portfolio of Canadian stocks and bonds.You meet a financial planner at a social gathering who suggests that you diversify your portfolio by investing in emerging market
Discuss why financial analysts consider antiques and art to be illiquid investments.Why do they consider coins and stamps to be more liquid than antiques and art?What must an investor typically do to
What are warrants and call options? How do they differ?
Compare the liquidity of an investment in raw land with that of an investment in common stock. Be specific as to why and how the liquidity differs. (Hint: Begin by defining liquidity.)
You can purchase convertible bonds from a rapidly growing company or from a utility. Speculate on which convertible bond would have the lower yield and discuss the reason for this difference.
Discuss whether you would expect any change in the correlations between Canadian stocks and the stocks for different countries. For example, discuss whether you would expect the correlation between
Discuss why you would expect a difference in the correlation of returns between securities from the Canada and from alternative countries (for example, Japan, the United States, South Africa).
Discuss why international diversification reduces portfolio risk. Specifically, why would you expect low correlation in the rates of return for domestic and foreign securities?
Discuss three factors that cause investors to consider including various global securities in their portfolios.
An investor is deliberating between a term deposit at a bank with a guaranteed return of 4% per annum and a credit union’s inflation protection fixed date deposit that pays 2% per annum plus annual
a. An Ontario resident in the lowest tax bracket (21.05%combined in 2009) can earn 10% on his investments in a tax-exempt RSP account.What will be the value of a $10,000 investment in 5 years? 10
a. Someone in the 29% tax bracket can earn 9% annually on her investments in a tax-exempt RSP account.What will be the value of a one-time $10,000 investment in 5 years? 10 years? 20 years?b. Suppose
What is the marginal tax rate for an Ontario resident if her taxable income is $20,000? $40,000? $80,000? What is her tax bill for each of these income levels? What is her average tax rate for each
Suppose your first job pays you $45,000 annually.What percentage should your cash reserve contain? How much life insurance should you carry if you are unmarried?How much if you are married with two
Use the Internet to find the websites for some financialplanning firms.What strategies do they emphasize? What do they say about their asset allocation strategy? What are their firms’
Use the questionnaire “How much risk is right for you?”(Exhibit 2.4, p. 33) to determine your risk tolerance.Use this information to help write a policy statement for yourself.
Your healthy 63-year-old neighbour is about to retire and comes to you for advice. From talking with her, you find out she was planning on taking all the money out of her company’s retirement plan
Assume that the consensus required return on common stocks is 14%. In addition, you read in the Bank of Canada Review that the expected rate of inflation is 5% and the estimated long-term real growth
What would your required return be on common stocks if you wanted a 5% risk premium to own common stocks given what you know from Problem 10? If common stock investors became more risk averse, what
You read in The Globe and Mail that a panel of economists has estimated that the long-run real growth rate of the Canadian economy over the next 5-year period will average 3%. In addition, a bank
During the past year, you had a portfolio that contained T-bills, long-term government bonds, and common stocks.The returns on each of them were as follows:T-bills 5.50%Government of Canada long-term
Without any formal computations, do you consider Hudson Bay Beer in Problem 6 or Light Computer in Problem 7 to present greater risk? Discuss your reasoning.
A stockbroker calls you and suggests that you invest in the Light Computer Company. After analyzing the firm’s annual report and other material, you believe that the distribution of expected
You are considering acquiring shares of common stock in the Hudson Bay Beer Corporation.Your return expectations are as follows:Compute the expected return [E(Ri)] on your investment in Hudson Bay
During the past five years, you owned two stocks that had the following annual rates of return:a. Compute the arithmetic mean annual return for each stock.Which stock is most desirable by this
The returns computed in Problems 1, 2, and 3 are nominal returns. Assuming that the rate of inflation during the year was 4%, compute the real returns on these investments. Compute the real returns
At the beginning of last year, you invested $4,000 in 80 shares of the Chang Corporation. During the year, Chang paid dividends of $5 per share. At the end of the year, you sold the 80 shares for $59
On August 15, you purchased shares of stock in the Cara Cotton Company at $65 a share, and a year later you sold it for $61 a share. During the year, you received dividends of $3 per share. Compute
On February 1, you bought a stock for $34 and sold it one year later for $39. During the year, you received a cash dividend of $1.50 per share. Compute your HPR and HPY on this investment.
You see in The Globe and Mail that the yield spread between BBB corporate bonds and AAA corporate bonds has gone from 350 basis points (3.5%) to 200 basis points (2%). Show graphically the effect of
Assume the long-run growth rate of the economy increased by 1% and the expected rate of inflation increased by 4%.What would happen to the required returns on government bonds and common stocks?Show
Explain why you would change your nominal required return if you expected the rate of inflation to go from 0(no inflation) to 4%. Give an example of what would happen if you did not change your
Draw a properly labelled graph of the security market line (SML) and indicate where you would expect the following investments to fall along that line. Discuss your reasoning.a. Common stock of large
You own stock in the Gentry Company, and you read in the financial press that a recent bond offering has raised the firm’s debt/equity ratio from 35% to 55%. Discuss the effect of this change on
Discuss the three components of an investor’s required return on an investment.
Some financial theorists consider the variance of the distribution of expected returns to be a good measure of uncertainty. Discuss the reasoning behind this measure of risk and its purpose.
The Globe and Mail reports that the yield on common stocks is about 2%, whereas a study at the University of Chicago contends that the annual returns on common stocks since 1926 has averaged about
Discuss why you would expect the saving–borrowing pattern to differ by occupation (e.g., for a doctor versus a plumber).
Discuss the overall purpose that people have for investing. Define investment.
6. Given the following investments:What can be said about the desirability of the investments using first- and second- order dominance? A Outcome B Outcome Probability % Probability % Probability 0.4
1. Consider the following investments. What can be said about their desirability using first- or second-order stochastic dominance? A B C Probability Outcome Probability Outcome Probability Outcome
10. Consider the following investments.Which is preferred if U(W) = W — 0.05W2? Investment A Investment B Outcome Probability Outcome Probability 579 0.20 6 0.30 0.50 8 0.60 10 0.30 9 0.10
3. Consider the following two investments:Which is preferred if the utility function is U(WO = 2W — 0.04W2? $ Outcome Investment A Investment B Probability $ Outcome Probability 555 2/5 1/5 5 1/2
1. Consider the following three investments. W-hich are preferred if W(112)w2Q Investment B Probability $ Outcome Probability $ Outcome Investment C Probability 555 1/3 1/3 4 1/4 1 1/5 7 1/2 9 3/5

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