Questions and Answers of Investments Analysis And Management

What are the stages in the life cycle for an industry? Can you think of other stages to add?
Name an industry that currently is in each of the four life cycle stages.
Which types of industries are the most sensitive to the business cycle? The least sensitive?
In which stage of the life cycle do investors face the highest risk of losing a substantial part of their investment?
Name the five competitive forces identified by Porter.
The important point of the Porter analysis is that industry structure is a function of industry profitability. Agree or disagree with this statement.
Explain how Figure 14‐2 might be useful to an investor doing industry analysis.Figure 14‐2 Sales Pioneering Expansion Stabilization Time Declining 1 1
How can a stock’s intrinsic value be determined?
What are the limitations of using the dividend discount model to determine intrinsic value?
What does the auditor’s report signify about the financial statements?
Assuming that a firm’s ROA exceeds its interest costs, why would it not be prudent to use vast amounts of debt to boost ROE and EPS?
How persistent are earnings growth rates for individual companies across time?
Assume that Intel announces a 40 percent increase in EPS for its most recent quarter, and the stock price immediately declines 15 percent, while the market as a whole is unchanged. How would you
What is the PEG ratio? Identify one information source where this ratio can be found for individual stocks
How does the Dow theory forecast how long a market movement will last?
Using a moving average, how is a sell signal generated?
Is it possible to prove or disprove categorically the validity of technical analysis?
How do the new contrarians differ from the more traditional contrarians?
Why do stock‐price movements repeat themselves?
Look at the bar chart of the Dow Jones Averages in section C1 of The Wall Street Journal. Does this chart cover a sufficient time period to apply the Dow theory?
Why would technical charts be useful in trying to apply the Dow theory?
When a bond is issued, its coupon rate is set at approximately __________________________.
Why is current yield an incorrect measure of a bond’s return?
YTM can be thought of as the internal rate of return on a bond investment. Agree or disagree, and explain your reasoning.
Given two bonds with identical risk, coupons, and maturity date, with the only difference between the two being that one is callable, which bond will sell for the higher price?
Which bond is more affected by interest‐oninterest considerations?a. Bond A—12 percent coupon, 20 years to maturityb. Bond B—6 percent coupon, 25 years to maturity
What two characteristics of a bond determine its reinvestment rate risk?
The bond price curve is said to have a convex shape. What does this mean in terms of increases and decreases in interest rates relative to changes in bond prices?
When does a bond sell at a discount, based on coupon rate and current yield? A premium?
Agree or disagree: For the typical bond investment, the YTM will seldom equal the RCY.
Agree or disagree: Holding everything else constant, the longer the maturity of a bond, the greater the reinvestment risk.
One analyst states that in valuing bonds she first constructs the theoretical spot rates and then discounts cash flows using these rates. Another analyst interjects that his firm takes a different
Determine the YTM of a 6.5 percent 20‐year bond that pays interest semiannually and is selling for $90.68.
What is the value of a zero‐coupon bond that matures in 20 years, has a maturity of $1 million, and is selling to yield 7.6 percent?
Consider the following two bond issues:Bond A: 5 percent 15‐year bond Bond B: 5 percent 30‐year bonda. Neither bond has an embedded option. Both bonds are trading in the market at the same
Under the expectations theory, long rates must be an average of the present and future short‐term rates. Explain.
What is the difference between the expectations theory and the liquidity preference theory?
Assume a U.S. investor buys French bonds. If the euro weakens, how does that affect the U.S. investor’s dollar‐denominated return?
A U.S. investor buying foreign bonds is selling the dollar. Agree or disagree and explain your reasoning.
When would bond yields be expected to move in the same direction as nominal GDP?
When would an expected increase in inflation negatively impact bond investors?
Why would an increase in the Fed’s federal funds rate target be expected to lead to an increase in the long‐term bond rate?
What is the key factor in analyzing bonds? Why?
Why are yield spreads important to an investor?
Identify and explain at least two passive bond management strategies.
How does duration differ from time to maturity? What does duration tell you?
What is meant by the term “bond mispricings?”
What does it mean to say an option buyer has a right but not an obligation?
What is the difference between option premiums and option prices?
Who writes puts and calls? Why?
How can the writer of a call option cancel his or her obligation?
What is the relationship between option prices and their intrinsic values? Why?
Which is greater for an option relative to the underlying common, dollar movements or return volatility? Why?
What is the maximum amount the buyer of an option can lose?
Is it possible for two calls identical in their characteristics except for the time to expiration to have approximately the same price?
Foothill College Endowment Fund Case Facts Type of investor Purpose Asset base Stated return desire Other return factors Institutional; endowment Provide annual scholarships currently totaling $39.5
What does it mean to say that futures trading is a zero‐sum game?
Which side benefits from a strengthening basis? A weakening basis?
Is it possible to construct a perfect hedge? Why or why not?
Which is the most popular stock‐index futures contract? Where is it traded?
How does the investment management process relate to financial planning?
What are the objectives of an investment strategy? Do these objectives have equal status?
What is meant by portfolio optimization?
What rule of thumb might investors follow when considering portfolio rebalancing?
A portfolio manager begins the year with $10,000. Halfway through the year $2,000 is withdrawn by the client. The value of the portfolio at the end of the year, reflecting the performance of the
Assume a client provides a portfolio manager with $500,000, which is invested at the beginning of the year. At year end, the account is worth $545,000. At the beginning of year two, the client
At the beginning of 2015, Fidelity’s Equity Income Fund had a beta of 0.89, whereas T. Rowe Price’s Growth and Income Fund had a beta of 0.99.
For what type of mutual fund discussed in Chapter 3 could you expect to find complete diversification? The following facts about mutual funds illustrate their importance to investors: Approximately
At the beginning of 2015, Fidelity’s Equity Income fund had an R2 of 0.95, whereas T. Rowe Price’s Growth and Income Fund had an R2 of 0.97.
Russell/Mellon is a leading provider of investment information services to more than 3,000 institutional investors such as pension funds, asset managers, and consultants. This company is able to
Assume that a large‐cap value manager earned an average active return relative to the Russell 1000 Value Index (the benchmark) of 2.2 percent. Furthermore, assume that the manager’s tracking risk
Assume you wish to evaluate the performance of a portfolio that had a 14 percent average return for a period of time, with a standard deviation of 23 percent. The market for the same period had an
Explain how Jensen’s alpha is derived from the CAPM.
Consider a midcap stock fund whose manager emphasizes stocks that currently are out of favor with investors. The manager believes that recent events have caused these stocks to sell for less than
Why is Jensen’s alpha computationally efficient?
Consider a domestic large‐cap equity fund manager who gradually shifts more of the portfolio’s assets to international stocks. Furthermore, the manager tends to inadvertently focus on midcap
What role does statistical significance play in the Jensen measure?
In theory, what would be the proper market index to use?
Explain why the steeper the angle, the better the performance in Figure 22‐1.Figure 22‐1 Rate of return 24 22 20 18 16 4 12 10 8 RF 5 W S&P 500- M 10 15 Standard deviation of
Do the Sharpe and Jensen measures produce the same rankings of portfolio performance?
What does the term “performance attribution” mean?
How do the Global Investment Performance Standards help investors?
What does style analysis seek to accomplish?
Paul Joubert retired from his firm. He has continued to hold his private retirement investments in a portfolio of common stocks and bonds. At the beginning of 2015, when he retired, his account was
Identify a major problem when using style analysis.
Identify a major problem when using style analysis.
Identify a major problem when using style analysis.
Paul Joubert retired from his firm. He has continued to hold his private retirement investments in a portfolio of common stocks and bonds. At the beginning of 2015, when he retired, his account was
For what type of mutual fund discussed in Chapter 3 could you expect to find complete diversification? The following facts about mutual funds illustrate their importance to investors: Approximately
Explain why the steeper the angle, the better the performance in Figure 22‐1.Figure 22‐1 Rate of return 24 22 20 18 16 4 12 10 8 RF 5 W S&P 500- M 10 15 Standard deviation of
Assume you wish to evaluate the performance of a portfolio that had a 14 percent average return for a period of time, with a standard deviation of 23 percent. The market for the same period had an
Explain how Jensen’s alpha is derived from the CAPM.
Do the Sharpe and Jensen measures produce the same rankings of portfolio performance?
How do the Global Investment Performance Standards help investors?
Identify a major problem when using style analysis.
At the beginning of 2015, Fidelity’s Equity Income fund had an R2 of 0.95, whereas T. Rowe Price’s Growth and Income Fund had an R2 of 0.97.
Assume a client provides a portfolio manager with $500,000, which is invested at the beginning of the year. At year end, the account is worth $545,000. At the beginning of year two, the client
Consider a domestic large‐cap equity fund manager who gradually shifts more of the portfolio’s assets to international stocks. Furthermore, the manager tends to inadvertently focus on midcap
In theory, what would be the proper market index to use?
Over a recent five‐year period, small‐cap value funds significantly outperformed large‐cap value funds. Therefore, the typical owner of a small‐cap value fund during that period should expect

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