Questions and Answers of Investments Analysis And Management

A $2,500 minimum is required to open an account in Fidelity’s Equity‐Income Fund (the minimum is only $500 for Fidelity retirement accounts). A minimum balance of $2,000 must be maintained.
Consider the three classes of shares for the MFS Massachusetts Investors Growth Stock Fund, A, B, and C. Each has a different combination of loads, fees, and total annual expenses as follows: Sales
American Funds is one of the largest mutual fund organizations. Rather than advertise extensively as does Fidelity and Vanguard, American sells funds through brokers at a maximum sales charge (load
The average annual total returns for the Titan Equity Fund and its corresponding market benchmark for several recent years were as follows: Therefore, investing $10,000 in the Titan Fund and
Fidelity’s Equity‐Income Fund is a no‐load fund, with no exchange fee for fund transfers within Fidelity’s fund family, and it has no 12b‐1 fee. The Vanguard Group operates a well‐ known
Janus Venture Fund, an equity fund with strong historical performance, had a return of −45 percent for the year 2000. However, it paid out $16.38 per share as a result of selling securities which
The State Street High Income Fund Class B shares have no up‐front sales charge. The fund had a return of 2.6 percent one year when the expense ratio was 2.17 percent. Therefore, before expenses the
Fidelity Investments offers access to a fund supermarket known as FundsNetwork. Hundreds of companies participate and provide access to over 10,000 funds.
How would an owner of shares of Fidelity’s Equity‐Income Fund “cash out?”
Research on IPOs identifies two major conclusions. First, IPO stocks generally skyrocket on their first day of trading, which suggests that they are underpriced at initial offering. Second, on
An analyst gathered the following data about stocks J, K, and L, which together form a value‐weighted index: The ending value‐weighted index (base index=100) is closest
Discuss the importance of the financial markets to the U.S. economy. Can primary markets exist without secondary markets?
From October 2012 to March 2013 an international index declined about 57 percent. It then advanced in 1 year about 69 percent. Determine by calculations if investors were ahead after the advance or
In 2008, in the midst of the financial crisis, the brokerage firm Merrill Lynch sold $6.6 billion of its own preferred shares through private placements to long‐term investors. This sale was
Discuss the functions of an investment banker.
Assume that you have a stock currently priced at $56 that moves exactly proportional to the S&P 500 Index. Over a six‐month period the index moves from 1,110 to 1,243.20. What should the price of
For the 20th century, the compound annual average return on the S&P 500 was 10.35%. How much would $1 have grown to over these 100 years?
In November 2011, Viacom announced it was moving from the New York Stock Exchange, after 40 years, to the NASDAQ Global Select Market. The opposite also occurs. In 2010, Charles Schwab, the large
Outline the process for a primary offering of securities involving investment bankers.
Assume that an international index is at 10,000. Some people are predicting that this index could lose 50% because of the economy’s difficulties. If that were to happen, what percentage rate of
Netflix, the DVD and streaming video company, enjoyed a stock price above $100 for many months. However, it tried to change its pricing policy and lost subscribers. In announcing 2011 third‐quarter
Outline the structure of equity markets in the United States. Distinguish between auction markets and negotiated markets.
The 52‐week low for the NASDAQ index occurred on 9/4/09 at 1982.05, while the 52‐week high occurred on 4/26/10 at 2,535.28. For the DJIA, the dates are the same, and the comparable numbers are
At the beginning of 2011, the S&P 500 Index had a value of 1282.62. At year‐end, the index value was 1300.58; thus, for 2011, the percent change was a meager 1.40%. Is this all that equity
In what way is an investment banker similar to a commission broker?
On March 18, 2000, the Dow gained approximately 500 points to close at 10,630.6. This was a percentage gain of 4.94 percent. In contrast, on October 21, 1987, the Dow gained 186.84 points to close at
Explain the role of the Designated Market Makers, the successors to specialists. Refer to the NYSE for information.
Since the NYSE features a fully automated auction, why do you think it also features a physical auction as well?
Is there any similarity between an NASDAQ market maker and a Designated Market Maker on an exchange?
Explain the difference between NASD and NASDAQ.
Explain what an ECN is.
What advantages do ECNs offer?
Why do you think the New York Stock Exchange in 2005 agreed to a merger with ArcaEx, a very different type of marketplace?
What is an OTC security? How are such securities traded?
In terms of how they are constructed, what are the two primary types of stock indexes currently being used in the United States?
What is meant by the term blue‐chip stocks? Cite three examples.
What is the EAFE Index?
Approximately how many stocks are listed on the NYSE? Does NASDAQ have more listed?
What is meant by in‐house trading? Who is likely to benefit from this activity?
a. Assume that you can buy U.S. Coal for $20 per share, either paying cash or buying on margin. The initial margin requirement is 50 percent, and the maintenance margin is 30 percent. U.S. Coal pays
What is meant by the statement, “The bond market is primarily an OTC market?”
Assume that Coca‐Cola and Visa, both of which are in the DJIA and in the S&P 500, have approximately equivalent market values (price multiplied by the number of shares outstanding) but very
ExxonMobil permits investors to buy up to $250,000 a year worth of Exxon stock from the company itself, with no commissions. Investors can open a direct‐purchase account with Exxon for as little as
You open a margin account at Chas Pigeon, a discount broker. You subsequently short Exciting.com at $286, believing it to be overpriced. This transaction is done on margin, which has an annual
In September 2014, the SEC filed charges against a roommate and a friend of a hedge fund analyst for insider trading ahead of an announcement that hedge fund Pershing Square Capital Management had
For a typical investor with a wrap account, how much attention do you think he or she receives from the designated money manager?
Using your same brokerage account as in Problem 5‐1 (same margin rate and transaction costs), assume that you buy IBM at $156 a share, on 60 percent margin. During the year, IBM pays a dividend of
If the initial margin requirement is 50 percent on a $9,000 transaction (100 shares at $90 per share), an investor who wants to fully use the margin provision must contribute $4,500, borrowing
Assume that the maintenance margin is 30 percent, with a 50 percent initial margin, and that the price of the stock declines from $90 to $80 per share. Equation 5-3 is used to calculate actual
Why are investors interested in having margin accounts? What risk do such accounts involve?
Assume an initial margin requirement of 50 percent and a maintenance margin of 30 percent. An investor buys 100 shares of stock on margin at $60 per share. The price of the stock subsequently drops
Assume an initial margin requirement of 50 percent and a maintenance margin of 30 percent. An investor buys 100 shares of stock on margin at $60 per share. The price of the stock subsequently drops
A closing price of 101.375 on a particular day for an IBM bond represents 101.375 percent of $1,000, or 1.01375 × $1,000 = $1,013.75. Treasury bond prices are quoted in 32nds and may be shown as
An investor in the 28 percent marginal tax bracket who is offered a 5 percent municipal bond would have to receive 0.05 / (1 0.28) = 6.94% from a comparable taxable bond to be as well off.
In September 2011, with the European fiscal crisis regularly in the news, it was reported that Moody’s Investors Services was expected to cut the ratings of three large French banks because of
A few examples of rating agency miscues include the following events. In December 2001, Enron was rated investment grade on a Friday. On Sunday, it filed for bankruptcy. Also at that time, S&P rated
Citicorp, a major bank, has a large Visa operation. In the past, it regularly took the cash flows from the monthly payments that customers make on their Visa accounts, securitized them, and sold the
What does it mean to say that investors in Ginnie Maes face the risk of early redemption?
The Coca‐Cola Company reported $33.173 billion as total stockholders’ equity for fiscal year‐end 2013. This is the book value of Coca‐Cola’s equity. Based on average shares outstanding of
Coca‐Cola’s 2013 earnings were $2.08 per share, and it paid an annual dividend per share that year of $1.12. Assuming a price for Coca‐Cola of $41.31 (on December 31, 2013), the dividend yield
Is there any relationship between a savings bond and a U.S. Treasury bond?
Assume that the board of directors of Coca‐Cola meets on May 26 and declares a quarterly dividend, payable on July 2. May 26 is called the declaration date. The board will declare a
Assume an investor shorts 100 shares of Sandisk at $100 per share. The investor must have $5,000 in the account (initial margin of 50 percent). The proceeds of the short sale are left in the account,
What is the margin requirement for U.S. government securities?
The financial crisis that began in 2008 was not a crisis for everyone. For example, David Einhorn from Greenlight Capital made a fortune during the financial crisis. Einhorn shorted the investment
Explain the role of market makers on NASDAQ.
What is the difference between a day order and an open order?
What is the role of the SEC in the regulation of securities markets?
Is there any link between margin accounts and short selling?
How popular are short sales relative to all reported sales?
A bond purchased at par ($1,000) and held to maturity provides a yield in the form of a stream of cash flows or interest payments but no price change. A bond purchased for $800 and held to maturity
Using the above data, for 100 shares, $4,500 borrowed, and a maintenance margin of 30 percent, a margin call will be issued when the price is MC price $4,500 100(1-0.30) : $64.29
Assume an investor named Erica believes that the price of General Motors (GM) will decline over the next few months and wants to profit if her assessment is correct. She calls her broker with
Explain the difference between the following types of orders: sell limit, buy limit, buy stop, and sell stop.
Assume that we know the performance of the S&P 500 Index for the first five years of the second decade of the 21st century, defined as 2010–2019. What annual geometric mean must the market average
Calculation of arithmetic mean and geometric mean: Data for Extell Corp.The arithmetic mean of the total returns for Extell, 2008–2012: To calculate the geometric mean in this example, convert the
The difference in meaning of the arithmetic and geometric mean, holding Extell stock over the period January 1, 2008, through December 31, 2012, for two different investment strategies, is as
Calculate the return and the return relative for the following assets:a. A preferred stock bought for $70 per share, held one year during which $5 per share dividends are collected, and sold for
Using the five years of returns, assume that one of the five years during the second half of the decade, 2015–2019, shows a loss of 10 percent. What would the geometric mean of the remaining four
At the beginning of the year, a $500,000 portfolio was invested half in stocks and half in bonds. At the end of the year, the portfolio had yielded $19,000 in dividends and interest. However, because
How long must an asset be held to calculate a return?
Calculate the arithmetic and geometric mean return for the S&P 500 (Table 6‐1) for the years 2000–2002. How does this change when 2003 is included?Table 6‐1 TABLE 6-1 Historical Composite
The returns shown in Table 6‐1 are calculated as shown in Equation 6-2. For example, the return (R) for 2010 for the S&P 500 Index was 14.82 percent, calculated asTable 6‐1Equation 6-2 R2010
Calculate the index value for the S&P 500 (Table 6‐1) assuming a $1 investment at the beginning of 1980 and extending through the end of 1989. Using only these index values, calculate the
Using the returns for Extell for the years 2008– 2012, we can illustrate the deviation of the values from the mean. The numerator for the formula for the variance of these Yt values is Σ(Yt -
Let’s calculate cumulative wealth per $1 invested for the 1990s, one of the two greatest decades in the 20th century in which to own common stocks. This will provide you with a perspective on
The geometric mean for the return for the S&P 500 Index for the period 1926– 2010 was 9.57 percent. Assume that the geometric mean for the yield component of the total return on the S&P 500 for the
Assume that one of your relatives, on your behalf, invested $100,000 in a trust holding S&P 500 stocks at the beginning of 1926. Using the data in Table 6‐6, determine the value of this trust
Suppose you know that cumulative inflation for the period 1926–2010 was 12.34. You also know that the geometric mean for Treasury bills for this period was 3.6 percent. What was the real return for
By using the geometric mean annual return for a particular financial asset, the cumulative wealth index can be found by converting the return on a geometric mean basis into a return relative and
In a recent year, the Brazilian market was up about 150 percent, but the currency adjustment for U.S. investors was negative (83 percent), leaving a U.S. dollar return for the year of approximately
Knowing the geometric mean for inflation for some time period, we can add 1.0 and raise it to the nth power. We then divide the cumulative wealth index on a nominal basis by the ending value for
Based on some calculations you have done, you know that the cumulative wealth for corporate bonds for the period 2008–2012 was $1.234. However, you have misplaced the return for 2010. The other
Now assume that your relative had invested $100,000 in a trust holding “small stocks” at the beginning of 1926. Determine the value of this trust at the end of 2010.
Consider a U.S. investor who invests in WalMex at 40.25 pesos when the value of the peso stated in dollars is $0.10. One year later, WalMex is at 52.35 pesos, and the stock paid no dividend. The peso
Assume that we know that for the period 1926–2010 the yield component for common stocks was 3.99 percent and that the cumulative wealth index was $2,420.46. The cumulative wealth index value for
Based on data from Table 6‐1 for the 10 years of the 1990s ending in 1999, the arithmetic mean is calculated in Table 6‐3: Table 6‐1Table 6‐3 X=[-3.14 + 30.00++20.87]/10 = 187.63/10 = 0.1876
What if your relative had invested $100,000 in a trust holding long‐term Treasury bonds at the beginning of 1926. Determine the value of this trust at the end of 2010.
Let’s consider the impact of the falling dollar on U.S. investors for one year, 2007. Canadian stocks earned Canadian investors 10.5 percent, but the gain for U.S. investors was 28.4 percent
Finally, what if this relative had invested $100,000 in a trust holding Treasury bills at the beginning of 1926. Determine the value of this trust by the end of 2010.

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