A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to Question 5?
> The liquidity of an asset directly affects the risk of buying or selling that asset during adverse market conditions. Describe the liquidity risk you face with a short stock position during a market rally and a long stock position during a market decline
> Suppose Microsoft is currently trading at $50. You want to sell it if it reaches $55. What type of order should you submit?
> Suppose your broker tips you on a hot stock. You invest heavily, but, to your considerable dismay, the stock plummets in value. What recourse do you have against your broker?
> Based on the historical record, rank the following investments in increasing order of risk. Rank the investments in increasing order of average returns. What do you conclude about the relationship between the risk of an investment and the return you expe
> The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the imp
> Jed Clampett just dug another oil well, and, as usual, it’s a gusher. Jed estimates that in two months, he’ll have 2 million barrels of crude oil to bring to market. However, Jed would like to lock in the value of this oil at today’s prices because the o
> A mutual fund that predominantly holds long-term Treasury bonds plans on liquidating the portfolio in three months. However, the fund manager is concerned that interest rates may rise from current levels and wants to hedge the price risk of the portfolio
> Suppose one of Fidelity’s mutual funds closely mimics the S&P 500 Index. The fund has done very well during the year, and, in November, the fund manager wants to lock in the gains he has made using stock index futures. Should he take a long or short posi
> Kellogg’s uses large quantities of corn in its breakfast cereal operations. Suppose the near-term weather forecast for the corn-producing states is drought like conditions, so corn prices are expected to rise. To hedge its costs, Kellogg’s decides to use
> True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
> Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case? a. Short-term interest rates increase unexpectedly. b. The interest rate a company pays on its short-term debt borrowing is increased by it
> True or false: It is impossible for a single asset to lie on the Markowitz efficient frontier.
> What is a stop-loss order? Why might it be used? Is it sure to stop a loss?
> Assume you are a very risk-averse investor. Why might you still be willing to add an investment with high volatility to your portfolio?
> True or false: If two stocks have the same standard deviation of 45 percent, then any portfolio of the two stocks will also have a standard deviation of 45 percent.
> True or false: If two stocks have the same expected return of 12 percent, then any portfolio of the two stocks will also have an expected return of 12 percent.
> What is an efficient portfolio?
> If the returns on two stocks are highly correlated, what does this mean? If they have no correlation? If they are negatively correlated?
> Suppose two assets have zero correlation and the same standard deviation. What is true about the minimum variance portfolio?
> Based on market history, what is the average annual standard deviation of return for a single, randomly chosen stock? What is the average annual standard deviation for an equally weighted portfolio of many stocks?
> What is interest rate risk? What are the roles of a bond’s coupon and maturity in determining its level of interest rate risk?
> What are the coupon rate and current yield on a bond? What happens to these if a bond’s price rises?
> What are premium, discount, and par bonds?
> What is the difference between a market order and a limit order? What is the potential downside to each type of order?
> Evaluate the following statement: “Treasury inflation protected securities (TIPS) pay a fixed coupon.”
> What are the three different types of Treasury STRIPS that are publicly traded?
> Why do you suppose rates on some money market instruments are quoted on a bank discount basis? (Hint: Why use a 360-day year?)
> What is LIBOR? Why is it important?
> Compare and contrast commercial paper and Treasury bills. Which would typically offer a higher interest rate? Why?
> What are pure discount securities? Give two examples.
> What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis?
> What is the “illusion of knowledge” and how does it impact investment performance?
> In the context of behavioral finance, why do men tend to underperform women with regard to the returns in their portfolios?
> Why do 401(k) plans with more bond choices tend to have participants with portfolios more heavily allocated to fixed income?
> Refer to Figure 4.5. Look at the three-year performance for the funds listed. Why do you suppose there are so few poor performers? Hint: Think about the hit TV show Survivor. Figure 4.5: Mutual Funds: Closing Quotes 00 TO: A|B|C|D|E|G|H|J|K|L|M|N|0
> Briefly explain mental accounting and identify the potential negative effect of this bias.
> To a technical analyst, what are support and resistance areas?
> Suppose you are flipping a fair coin in a coin-flipping contest and have flipped eight heads in a row. What is the probability of flipping a head on your next coin flip? Suppose you flipped a head on your ninth toss. What is the probability of flipping a
> In the context of Dow theory, what are the three forces at work at all times? Which is the most important?
> If a market is semi strong-form efficient, is it also weak form efficient? Explain.
> Assume that markets are efficient. During a trading day, American Golf, Inc., announces that it has lost a contract for a large golfing project that, prior to the news, it was widely believed to have secured. If the market is efficient, how should the st
> The efficient markets hypothesis implies that all mutual funds should obtain the same expected risk-adjusted returns. Therefore, we can simply pick mutual funds at random. Is this statement true or false? Explain.
> Critically evaluate the following statement: “Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.”
> A famous economist just announced in The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from investing in the stock market after you read this announcem
> Your broker commented that well-managed firms are better investments than poorly managed firms. As evidence, your broker cited a recent study examining 100 small manufacturing firms that eight years earlier had been listed in an industry magazine as the
> If you were concerned about the liquidity of mutual fund shares that you held, would you rather hold shares in a closed-end fund or an open-end fund? Why?
> What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?
> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
> Referring to Questions 5 and 6, under what circumstances might a company choose not to pay dividends? Data from Questions 5: Why does the value of a share of stock depend on dividends? Data from Questions 6: A substantial percentage of the companies
> Why does the value of a share of stock depend on dividends?
> Why do we need to convert the typical equity beta to value a firm using FCF?
> What happens in the residual income model when EPS is negative?
> Why do growth stocks tend to have higher P/E ratios than value stocks?
> If a firm has no dividends and has negative earnings, which valuation models are appropriate?
> What is the basic principle behind dividend discount models?
> What are 12b-1 fees? What expenses are 12b-1 fees intended to cover? Many closed-end mutual funds charge a 12b-1 fee. Does this make sense to you? Why or why not?
> What are Vega’s money- (or dollar-) weighted average returns over the five-year period for Scenarios 2 and 3? Scenarlo 2 Scenario 3 a. 7.78% 7.96% b. 7.96% 7.78% с. 9.00% 7.85%
> Is it necessarily true that, all else the same, an index with more stocks is better? What is the issue here?
> There are basically four factors that differentiate stock market indexes. What are they? Comment on each.
> With regard to the NASDAQ, what are inside quotes?
> Suppose Tesla is currently trading at $200. You think that if it reaches $210, it will continue to climb, so you want to buy it if and when it gets there. Should you submit a limit order to buy at $210?
> Why would floor brokers be willing to pay $40,000 per year just for the right to trade on the NYSE?
> Why would venture capitalists provide financing in stages?
> In your local Chevrolet retailer, both a primary and a secondary market are in action. Explain. Is the Chevy retailer a dealer or a broker?
> What is the difference between a money market deposit account and a money market mutual fund? Which is riskier?
> Mr. Green and Ms. Hutchinson divided up their research into return enhancement and diversification benefits. Based upon the stated goals of their research, which of the two approaches is more likely to lead to an appropriate choice? a. Green’s research.
> Mr. Wallace is particularly interested in the effects of a steepening yield curve. Which of the following is most accurate for a steepening curve? a. The price of short-term Treasuries increases relative to long-term Treasuries. b. The price of long-term
> An open-end mutual fund typically keeps a percentage, often around 5 percent, of its assets in cash or liquid money market assets. How does this affect the fund’s return in a year in which the market increases in value? How about during a bad year? Close
> According to the expectations theory, which of the following is closest to the one-year implied forward rate one year from now? a. 6.58 percent b. 5.75 percent c. 6.25 percent
> Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the market segmentation theory. a. The market expects short-term rates to rise through the relevant future. b. There is greater demand for short-term
> Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the pure expectations theory. a. The market expects short-term rates to rise through the relevant future. b. There is greater demand for short-term s
> Which of the following would Mr. Higgins, Ms. McHale, and Mr. Sims be least likely to use when making investment decisions? a. Heuristics b. Their personal experiences c. Fundamental analysis
> Which of the following best describes Jack Sims’s behavioral characteristic in investment decisions? a. Jack is overconfident. b. Jack uses frame dependence. c. Jack uses representativeness.
> Which of the following best describes Joanne McHale’s behavioral characteristic in investment decisions? a. Joanne is loss averse. b. Joanne uses the ceteris paribus heuristic. c. Joanne is experiencing the snakebite effect.
> Which of the following best describes the potential problem with Mr. Higgins’s investment strategy? a. He will underestimate the risk of his portfolio and underestimate the impact of an event on stocks. b. He will overestimate the risk of his portfolio a
> Which of the following best describes Tom Higgins’s behavioral characteristic in investment decisions? a. Tom is overconfident. b. Tom uses frame dependence. c. Tom uses anchoring.
> Assume that when Mr. White and Ms. Plain entered their buy order for GHT, the price of the stock increased to $25.45. This is the price at which the trade was executed. Given this impact, the effective spread was _____ that in Question 2 above. a. Lower
> In the example given by Ms. Plain, what was the spread for the GHT stock just prior to execution? a. $0.06 b. $0.02 c. $0.04
> ETFs and index mutual funds hold similar underlying assets. Why might an investor prefer one over the other?
> Which of the following statements regarding market orders is most accurate? Market orders: a. Have price uncertainty, and limit orders have execution uncertainty. b. Have execution uncertainty, and limit orders have price uncertainty. c. And limit orders
> Which of Ms. Harlan’s responses is most likely to make Mr. Phillips consider her a bad candidate for investing in hedge funds? a. I pay a lot of attention to expense and return data from my investments and track their performance closely. b. I pay severa
> If Ms. Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? a. None of them b. Kelly Tool and Die c. Hedge funds
> What are Barbara’s willingness and ability to assume risk? Ability Average Average Above average Willngness a. Above average b. Below average c. Above average
> What is Ms. Harlan’s tolerance for risk? a. Distressed security b. Arbitrage c. Market neutral
> In an attempt to talk Ms. Harlan out of investing in a fund of funds, Mr. Phillips addressed the advantages of investing in individual funds. Which of the following would be his most compelling argument? a. The lower expenses of individual funds b. The l
> An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to lose money?
> An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to earn between −13 percent and 35 p
> Ross Co., Westerfield, Inc., and Jordan Company announced a new agreement to market their respective products in China on July 18, February 12, and October 7, respectively. Given the information below, calculate the cumulative abnormal return (CAR) for t
> A stock is currently priced at $53.87 and the futures on the stock that expire in six months have a price of $55.94. The risk-free rate is 5 percent and the stock is not expected to pay a dividend. Is there an arbitrage opportunity here? How would you ex
> Is it true that the NAV of a money market mutual fund never changes? How is this possible?
> A non-dividend-paying stock is currently priced at $48.15 per share. A futures contract maturing in five months has a price of $48.56 and the risk-free rate is 4 percent. Describe how you could make an arbitrage profit from this situation. How much could
> You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.15 measured relative to the S&P Midcap 400, and the net asset value of the fund is
> You are short 15 gasoline futures contracts, established at an initial settle price of $2.085 per gallon, where each contract represents 42,000 gallons. Your initial margin to establish the position is $7,425 per contract and the maintenance margin is $6
> You are long 10 gold futures contracts, established at an initial settle price of $1,500 per ounce, where each contract represents 100 troy ounces. Your initial margin to establish the position is $12,000 per contract and the maintenance margin is $11,20
> Margin Call (LO2, CFA2) Suppose the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts today, where each contract represents 42,000 gallons. Tomorrow, the cont
> Calculate Jensen’s alpha for the fund, as well as its information ratio. Data for Problem 19: You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know
> You are constructing a portfolio of two assets, asset A and asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29 percent and 48 percent, respectively. The correlation betwee
> For the stock in Problem 13, what is the smallest expected gain over the next year with a probability of 1 percent? Does this number make sense? What does this tell you about stock return distributions? Data from Problem 13: A stock has an annual retur
> Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4 percent, the expected return on the market is 11.5 percent, and the betas of the two stocks are 1.2 and 0.9,
> Consider the following information on Stocks I and II: The market risk premium is 8 percent and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riski
