Question: Briefly describe each of the following plans

> You have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data. You have been told that you can create two portfolios—one consisting of assets A and B and the other consisting of

> You have been given the following return data on three assets—F, G, and H—over the period 2018–2021. Using these assets, you have isolated three investment alternatives: Alternative Investment

> Refer to Problem 5.3. Assume that asset L represents 60% of the portfolio and asset M is 40%. Calculate the average return and standard deviation of this portfolio’s returns over the six-year period. Compare your answers to the answers

> Referring to Problem 5.30, assume that you believe that each of the five assets will earn the return shown in the table below. Based on these figures and the weights in Problem 5.29, what returns do you believe that Portfolios A and B will earn. Which po

> Briefly describe the composition and general thrust of each of the following indexes. a. NYSE Composite Index b. NYSE MKT Composite Index c. Nasdaq Stock Market indexes d. Value Line Composite Index

> Describe the two items an investor should consider before reaching a decision to sell an investment.

> Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The projected returns over the next six years, 2018–2023

> Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the

> Stock A has a beta of 0.8, stock B has a beta of 1.4, and stock C has a beta of -0.3. a. Rank these stocks from the most risky to the least risky. b. If the return on the market portfolio increases by 12%, what change in the return for each of the stocks

> In the stock valuation framework, how can you tell whether a particular security is a worthwhile investment candidate? What roles does the required rate of return play in this process? Would you invest in a stock if all you could earn was a rate of retur

> If portfolio A has a beta of 1.5 and portfolio Z has a beta of -1.5, what do the two values indicate? If the return on the market rises by 20%, what impact, if any, would this have on the returns from portfolios A and Z? Explain.

> For his portfolio, Jack Cashman randomly selected securities from all those listed on the New York Stock Exchange. He began with one security and added securities one by one until a total of 20 securities were held in the portfolio. After each security w

> Portfolios A through J, which are listed in the following table along with their returns (rp) and risk (measured by the standard deviation, sp), represent all currently available portfolios in the feasible or attainable set. a. Plot the feasible, or at

> The risk-free rate is currently 3%, and the market return is 10%. Assume you are considering the following investments. Investment ……………………………………………………………………………. Beta A ………………………………………………………………………………………………. 1.5 B ………………………………………………………………………………………………. 1.

> Jay is reviewing his portfolio of investments, which include certain stocks and bonds. He has a large amount tied up in U.S. Treasury bills paying 3%. He is considering moving some of his funds from the T-bills into a stock. The stock has a beta of 1.25.

> Use the capital asset pricing model to find the required return for each of the following securities in light of the data given. Security Risk-Free Rate Market Return Beta A 5% 8% 1.3 В 8% 13% 0.9 9% 12% 0.2 10% 15% 1.0 6% 10% 0.6

> Identify and briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. Note especially how economic issues fit into industry analysis.

> Referring to Problem 5.20, using the portfolio beta, what would you expect the value of your portfolio to be if the market rallied 20%? Declined 20%? Problem 5.20: Referring to Problem 5.19, assume you have a portfolio with $20,000 invested in each of

> List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor’s Corporation. Indicate the number and source of the securities used in calculating each average or index.

> Using your data from Problem 5.1, calculate the portfolio standard deviation. Problem 5.1: Your portfolio had the values in the following table for the four years listed. There were no withdrawals or contributions of new funds to the portfolio. Calcula

> Assume the betas for securities A, B, and C are as shown here. Security ……………………………………………………………………………………. Beta A ……………………………………………………………………………………………….. 1.4 B ……………………………………………………………………………………………….. 0.8 C ……………………………………………………………………………………………….. -0.9 a. Ca

> What is the market multiple and how can it help in evaluating a stock’s P/E ratio? Is a stock’s relative P/E the same thing as the market multiple? Explain.

> A security has a beta of 1.2. Is this security more or less risky than the market? Explain. Assess the impact on the required return of this security in each of the following cases. a. The market return increases by 15%. b. The market return decreases by

> Imagine you wish to estimate the betas for two investments, A and B. You have gathered the following return data for the market and for each of the investments over the past 10 years, 2008–2017. a. On a set of market return (x-axis)&a

> Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Lowe’s (LOW) to create an Excel spreadsheet that calculates the correlation coefficient for HD and LOW annual returns. Problem 5.9: The following table contains an

> Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Lowe’s (LOW) to create an Excel spreadsheet that calculates the standard deviation of annual returns for HD, LOW, and the equally weighted portfolio of HD and LOW.

> The following table lists the lump sum payout, the timing of that payout, and the discount rate associated with five different investments. Calculate the present value of each investment. Investment Future Sum Discount Rate Payout at End of Year $ 7

> Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.

> Assume you can earn 9% on the investments described below. How much money would each investment provide for you after six years? a. Invest $5,000 as a lump sum today. b. Invest $2,000 at the end of each of the next six years. c. Invest a lump sum of $3,0

> If you deposit $1,000 into an account at the end of each of the next 10 years and the account pays an annual interest rate of 2%, how much will be in the account after 10 years?

> The following table describes the characteristics of five annuities. Calculate the future value of each annuity given its characteristics. Annual Annuity Payment Annuity Length (yr) Interest Deposit Rate $ 2,500 $ 500 $ 1,000 A 8% 10 B 12% 6 20% D $

> The chart shows the number of global corporate bond issues for which Standard & Poor’s issued ratings upgrades or downgrades every year from 1981 to 2014. a. What is the trend in the number of ratings changes (both upgrades and down

> For each of the following initial investment amounts, calculate the future value at the end of the investment period if interest compounds annually. Investment Investment Amount Rate of Return Investment Period (yr) $ 200 $ 4,500 A 5% 20 8% 7 $10,00

> Can the growth prospects of a company affect its price-to-earnings multiple? Explain. How about the amount of debt a firm uses? Are there any other variables that affect the level of a firm’s P/E ratio?

> Which investment approach (or approaches) do you feel would be most appropriate for a quality-conscious investor? What kind of investment approach do you think you’d be most comfortable with? Explain.

> Using a financial calculator or spreadsheet, calculate the following. a. The future value of a $350 deposit left in an account paying 6% annual interest for 10 years. b. The future value at the end of five years of a $700 annual end-of-year deposit into

> Kent Weitz wishes to assess whether the following investments are satisfactory. Use his required return (discount rate) of 17% to evaluate each investment. Make an investment recommendation to Kent. Investment ($) A B Purchase Price $13,000 $8,500 E

> Terri Allessandro has an opportunity to make any of the following investments. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can earn a 10% rate of return on investments similar to those

> Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?

> Using a financial calculator or an Excel spreadsheet, calculate the following. a. The present value of $500 to be received four years from now, using an 11% discount rate. b. The present value of the following end-of-year income streams, using a 9% disco

> For each of the investments below, calculate the present value of the annual end-of-year payments at the specified discount rate over the given period. Investment Annual Payments Discount Rate Period (yr) $ 1,200 $ 5,500 A 7% 3 B 12% 15 $ 700 20% 9

> Consider the streams of income given in the following table. a. Find the present value of each income stream, using a 1% discount rate, then repeat those calculations using an 8% discount rate. b. Compare the present values and discuss them in light of t

> Find the present value of each of the following streams of income, assuming a 12% discount rate. A End of Year Income End of Year Income End of Year Income 1 $2,200 1 $10,000 1-5 $10,000/yr $3,000 $5,000/yr $ 8,000/yr 2 2-5 6-10 $4,000 6 $7,000 4 $6

> The accompanying table shows a series of transactions in a savings account. The account pays 6% simple interest, and the account owner withdraws interest as soon as it is paid. Create a new table that shows (a) the account balance at the end of each year

> Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. a. The risk-free rate of return, rf b. The required returns for investments A and B

> At the beginning of this chapter you read about a 2015 earnings announcement from HP in which earnings per share were reported as $1.85 for the quarter. Let’s make a simple assumption and say that earnings for the year were four times as much, or $7.40 p

> Are the expected future earnings of the firm important in determining a stock’s investment suitability? Discuss how these and other future estimates fit into the stock valuation framework.

> Refer to the table in Problem 4.5. What is the total return in dollars and as a percentage of your original investment if you purchased 100 shares of the investment at the beginning of 2013 and sold it at the end of 2015? Problem 4.5: Consider the hist

> Consider the historical data for an investment given in the accompanying table. a. Calculate the total return (in dollars) for each year. b. Indicate the level of return you would expect in 2018 and in 2019. c. Comment on your forecast. Market Value

> The historical returns for two investments—A and B—are summarized in the following table for the period 2013 to 2017. Use the data to answer the questions that follow. a. On the basis of a review of the return data,

> For each of the following streams of dividends, estimate the compound annual rate of growth between the earliest year for which a value is given and 2017. Dividend Stream Year A B 2008 $1.50 2009 $1.55 2010 $1.61 2011 $1.68 $2.50 2012 $1.76 $2.60 20

> Assume that an investment generates the following income stream and can be purchased at the beginning of 2017 for $1,000 and sold at the end of 2020 for $1,200. Estimate the IRR for this investment. If a minimum return of 9% is required, would you recomm

> Elliott Dumack must earn a minimum rate of return of 11% to be adequately compensated for the risk of the following investment. Initial Investment …………………………………………………….. $14,000 End of Year Income 1 ………………………………………………………………………………… $6,000 2 …………………………………

> Use a financial calculator or an Excel spreadsheet to estimate the IRR for each of the following investments. Investment A B Initial Investment $8,500 $9,500 End of Year Income 1 $2,500 $2,000 2 $2,500 $2,500 $2,500 $3,000 4 $2,500 $3,500 5 $2,500 $

> Your friend asks you to invest $10,000 in a business venture. Based on your estimates, you would receive nothing for three years, at the end of year four you would receive $4,900, and at the end of year five you would receive $14,500. If your estimates a

> You invest $7,000 in stock and receive dividends of $65, $70, $70, and $65 over the following four years. At the end of the four years, you sell the stock for $7,900. What was the IRR on this investment?

> Assume you invest $4,000 today in an investment that promises to return $9,000 in exactly 10 years. a. Use the present value technique to estimate the IRR on this investment. b. If a minimum annual return of 9% is required, would you recommend this inves

> Briefly describe the price-to-sales ratio and explain how it is used to value stocks. Why not just use the P/E multiple? How does the P/S ratio differ from the P/BV measure?

> In this problem we will visit United Rentals Inc. (URI), which was introduced at the beginning of the chapter. The following table shows the monthly return on URI stock and on the S&P 500 stock index from January 2009 to December 2014. a. Using an

> Explain the role that formula plans can play in the timing of security transactions. Describe the logic underlying the use of these plans.

> Define and differentiate between the following pairs of terms. a. Treasury stock versus classified stock b. Round lot versus odd lot c. Par value versus market value d. Book value versus investment value

> You are considering two investment alternatives. The first is a stock that pays quarterly dividends of $0.25 per share and is trading at $20 per share; you expect to sell the stock in six months for $24. The second is a stock that pays quarterly dividend

> If you place a stop-loss order to sell at $23 on a stock currently selling for $26.50 per share, what is likely to be the minimum loss you will experience on 50 shares if the stock price rapidly declines to $20.50 per share? Explain. What if you had plac

> Imagine that you have placed a limit order to buy 100 shares of Sallisaw Tool at a price of $38, although the stock is currently selling for $41. Discuss the consequences, if any, of each of the following situations. a. The stock price drops to $39 per s

> Al Cromwell places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $50 per share. Ignoring brokerage commissions, determine how much money Cromwell will probably have to pay. If he h

> Deepa Chungi wishes to develop an average, or index, that can be used to measure the general behavior of stock prices over time. She has decided to include six closely followed, high-quality stocks in the average or index. She plans to use August 15, 198

> The SP-6 Index (a fictitious index) is used by many investors to monitor the general behavior of the stock market. It has a base value set equal to 100 at January 1, 1978. In the accompanying table, the closing market values for each of the six stocks in

> Charlene Hickman expected the price of Bio International shares to drop in the near future in response to the expected failure of its new drug to pass FDA tests. As a result, she sold short 200 shares of Bio International at $27.50. How much would Charle

> Calculate the profit or loss per share realized on each of the following short-sale transactions. Stock Sold Short at Stock Purchased to Cover Transaction Price/Share Short at Price/Share $83 $75 $30 $18 $27 A $24 $15 $32 $45 $53 BCDE

> An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%, and the maintenance margin is 30%. The price of the stock rises to $28 per share. What is the margin, and will there be a margin call?

> What is industry analysis, and why is it important?

> What role do an investor’s portfolio objectives play in constructing a portfolio?

> An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%, and the maintenance margin is 30%. The price of the stock falls to $12 per share. What is the margin, and will there be a margin call?

> The table below shows the annual change in the average U.S. home price from 2005 to 2014 according to the S&P/Case-Shiller Index. Calculate the average annual return and its standard deviation. Compare this to the average return and standard deviatio

> You have $5,000 in a 50% margin account. You have been following a stock that you think you want to buy. The stock is priced at $52. You decide that if the stock falls to $50, you would like to buy it. You place a limit order to buy 300 shares at $50. Th

> You own 500 shares of Ups & Downs, Inc., stock. It is currently priced at $50. You are going on vacation, and you realize that the company will be reporting earnings while you are away. To protect yourself against a rapid drop in the price, you place a s

> Not long ago, Jack Edwards bought 200 shares of Almost Anything Inc. at $45 per share; he bought the stock on margin of 60%. The stock is now trading at $60 per share, and the Federal Reserve has recently lowered initial margin requirements to 50%. Jack

> Marlene Bellamy purchased 300 shares of Writeline Communications stock at $55 per share using the prevailing minimum initial margin requirement of 50%. She held the stock for exactly four months and sold it without brokerage costs at the end of that peri

> An investor buys 200 shares of stock selling at $80 per share using a margin of 60%. The stock pays annual dividends of $1 per share. A margin loan can be obtained at an annual interest cost of 8%. Determine what return on invested capital the investor w

> Jerri Kingston bought 100 shares of stock at $80 per share using an initial margin of 50%. Given a maintenance margin of 25%, how far does the stock have to drop before Jerri faces a margin call? (Assume that there are no other securities in the margin a

> Miguel Torres purchased 100 shares of CantWin.com.com for $50 per share, using as little of his own money as he could. His broker has a 50% initial margin requirement and a 30% maintenance margin requirement. The price of the stock falls to $30 per share

> Assume that an investor buys 100 shares of stock at $35 per share, putting up a 75% margin. a. What is the debit balance in this transaction? b. How much equity funds must the investor provide to make this margin transaction? c. If the stock rises to $55

> Explain the role of portfolio revision in the process of managing a portfolio.

> What effect, if any, does inflation have on common stocks?

> Chris LeBlanc estimates that if he does five hours of research using data that will cost $75, there is a good chance that he can improve his expected return on a $10,000, 1-year investment from 8% to 10%. Chris feels that he must earn at least $20 per ho

> You sell 200 shares of a stock short for $60 per share. You want to limit your loss on this transaction to no more than $1,400. What order should you place?

> Following is a sample of 11 Level-I CFA exam questions that deal with many topics covered in Chapters 6, 7, 8, and 9 of this text, including the use of financial ratios, various stock valuation models, and efficient market concepts. (Note: When answering

> Elmo Inc.’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. a. She sells short and repurch

> Erin McQueen purchased 50 shares of BMW, a German stock traded on the Frankfurt Exchange, for €64.5 (euros) per share exactly one year ago when the exchange rate was €0.67>US$1. Today the stock is trading at €71.8 per share, and the exchange rate is €0.7

> What Is the Mystery in Futures Markets?

> Why do you think sell ratings tend to cause stock prices to fall, while buy ratings do not lead to stock price increases?

> Two investments offer a series of cash payments over the next four years, as shown in the following table. a. What is the total amount of money paid by each investment over the four years? b. From a time value of money perspective, which of these inves

> Differentiate between the financial advice you would receive from a traditional investment advisor and one of the new online planning and advice sites. Which would you prefer to use, and why? How could membership in an investment club serve as an alterna

> It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating results of the company issuing the bond. Just as fina

> Prepare a checklist of questions and issues you would use when shopping for a stockbroker. Describe both the ideal broker and the ideal brokerage firm, given your investment goals and disposition. Discuss the pros and cons of using a full-service rather

> Briefly describe each of the following: a. Gross domestic product b. Leading indicators c. Money supply d. Producer prices

> Describe how, if at all, a conservative and an aggressive investor might use each of the following types of orders as part of their investment programs. Contrast these two types of investors in view of these preferences. a. Market b. Limit c. Stop-loss

> Why do you think some large, well-known companies such as Cisco Systems, Intel, and Microsoft prefer to trade on the Nasdaq OMX markets rather than on an organized securities exchange such as the NYSE (for which they easily meet the listing requirements)

> From 1999 to 2014, the average IPO rose by 19% in its first day of trading. In 1999, 117 deals doubled in price on the first day. What factors might contribute to the huge first-day returns on IPOs? Some critics of the current IPO system claim that under

> Following is a sample of 12 Level-I CFA exam questions that deal with many of the topics covered in Chapters 14 and 15 of this text, including basic properties of options and futures, pricing characteristics, return behavior, and various option strategie