Describe an ETF, and explain how these funds combine the characteristics of both open-end and closed-end funds. Consider the Vanguard family of funds. Which of its funds most closely resembles a “spider” (SPDR)? In what respects are the Vanguard fund (that you selected) and spiders the same? How are they different? If you could invest in only one of them, which would it be? Explain.
> Referring to Problem 5.30, if the risk-free rate is 2% and the market return is 7%, calculate the required return for each portfolio using the CAPM. Data from Problem 5-30: Jason Jackson is attempting to evaluate two possible portfolios consisting
> Jason Jackson is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. He is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the
> Assume you are considering a portfolio containing assets 1 and 2. Asset 1 will represent 55% of the dollar value of the portfolio, and asset 2 will account for the other 45%. The projected returns over the next six years, 2021–2026, for
> 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 riskiest 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 w
> Suppose that the risk-free rate is 3% and the expected return on the market portfolio is 10%. A certain stock has a beta of 1.0. You believe that over the next year, this stock will produce a return of 11%. Would you say that the stock is overpriced or
> 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 atta
> The risk-free rate is currently 3%, and the market return is 9%. Assume you are considering the following investments. a. Which investment is most risky? Least risky? b. Use the capital asset pricing model to find the required return on each of the inves
> Jay is reviewing his portfolio. 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 1.20. If Jay believes the stock will earn 14% next year (a l
> Assume the risk-free rate is 3% and the expected return on the market portfolio is 10%. Use the capital asset pricing model to find the required return for each of the following securities.
> An investor believes that the U.S. dollar will rise in value relative to the Japanese yen. The same investor is considering two investments with identical risk and return characteristics. One is a stock trading in yen in Japan and the other is a stock tr
> Referring to Problem 5.21, using the portfolio beta and assuming a risk-free rate of 5%, what would you expect the value of your portfolio to be if the market earned 20% next year? Declined 20%? Data from Problem 5-21: Referring to Problem 5.20, assume
> Referring to Problem 5.20, assume you have a portfolio with $20,000 invested in each of investments A, B, and C. What is your portfolio beta? Dara from Problem 5-20: Assume the betas for securities A, B, and C are as shown here.
> Assume the betas for securities A, B, and C are as shown here. a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13% over the next period. b. Calculate the change in return for each securit
> Using your data from Problem 5.1, calculate the portfolio standard deviation. Data from 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
> 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
> For each case in the following table, use the capital asset pricing model to find the expected (i.e., required) return.
> Last year, Rocket Inc. earned a 20% return. Farmer’s Corp. earned 10%. The overall market return last year was 16%, and the risk-free rate was 2%. If Rocket stock has a beta of 2.0 and Farmer’s has a beta of 0.5, which stock performed better once you tak
> Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The historical returns over the last 6 years, 2013&aci
> Indicate whether each statement is true or false, and provide an explanation for your answer. a. A stock is completely uncorrelated with the overall market. This stock will have an expected return equal to the risk-free rate. b. Stock 1 has a beta of 1.0
> The beta of Pacific Ventures is 1.2, and the beta of Delta Growers is 0.8. Which of the following statements is most accurate? Explain. a. Pacific Ventures has higher total risk than Delta Growers. b. Pacific Venture has a higher expected return than Del
> Harold Perto purchased 100 shares of Barclays, a UK financial services firm, when they were trading for £260 (pounds sterling) and the exchange rate between British pounds and U.S. dollars was $1.50 per pound. A few months later, Harold sold his Barclays
> Refer back to the annual returns for Consolidated Edison and Central Valley Bancorp in Problem 5.12. Following are the annual returns on a broad market index from 2008 to 2017. a. On a set of market return (x-axis)–investment return (y-
> The following table contains annual returns from 2008 to 2017 for two stocks, Consolidated Edison (ED) and Central Valley Community Bancorp (CVCY). Use Excel to create a spreadsheet that calculates the average return, standard deviation, and correlation
> Create an Excel spreadsheet that graphs the portfolio return and standard deviation combinations found in Problem 5.10 for Home Depot and Lowe’s.
> 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 average returns for portfolios that comprise HD and LOW using the following, respective, weightings:
> 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. Calculate your average return over the four-year period.
> Describe how, if at all, conservative and aggressive investors might use each of the following types of transactions as part of their investment programs. Contrast these two types of investors in view of these preferences. a. Long purchase b. Margin trad
> Critics of longer trading hours believe that expanded trading sessions turn the stock market into a casino and place the emphasis more on short-term gains than on long-term investment. Do you agree? Why or why not? Is it important to have a “breathing pe
> 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.
> On the basis of the current structure of the world’s financial markets and your knowledge of the NYSE and Nasdaq OMX markets, describe the key features, functions, and problems that would be faced by a single global market (exchange) on which transaction
> What role, if any, will short-term investments play in your portfolio? Why? Complete the following table for the short-term investments listed. Find their current yields online, and explain which, if any, you would include in your investment portfolio.
> Assume that you are 35 years old, are married with two young children, are renting a condo, and have an annual income of $100,000. Use the following questions to guide your preparation of a rough investment plan consistent with these facts. a. What are y
> Assume you’re interested in investing in gold to protect against an expected significant decline in consumer confidence and securities values. a. Isolate and evaluate the various alternatives for investing in gold coins, gold stocks, gold futures, and go
> Assume you have inherited a large sum of money and wish to use part of it to make a real estate investment. a. Would you invest in income property or speculative property? Why? Describe the key characteristics of the income or speculative property on whi
> Imagine that, given your current age and marital status, you have decided to make the maximum contribution to an individual retirement arrangement (IRA) each year from now until age 65. (Assume that the current maximum contribution rate will remain uncha
> Assume you have a sizable gain on 200 shares of stock that you bought two years ago for $22 per share and that is now (December 15) selling for $50 per share. Given a just-announced tax rate cut, effective next calendar year, you want to delay realizing
> Obtain a copy of the most recent year’s Form 1040 (U.S. Individual Income Tax Return), along with Schedules A (Itemized Deductions), B (Interest and Dividend Income), and D (Capital Gains and Losses), and instructions for preparing the return. Use your a
> Is it possible for a firm to pass (miss) dividends on preferred stocks, even if it earns enough to pay them? Explain. What usually happens when a company passes a dividend on a cumulative preferred stock? Are common stock dividends affected in any way?
> Briefly describe each of the following, and note how each differs from a conventional preferred stock. a. Convertible preferreds b. Floating-rate preferreds c. Prior preferred stocks d. Trust preferreds As an investor, why would you choose a convertible
> You have $100 to invest. If you put the money into an account earning 5% interest compounded annually, how much money will you have in 10 years? How much money will you have in 10 years if the account pays 5% simple interest?
> On the basis of the information provided, indicate how much profit or loss you would make in each of the futures transactions listed. a. You buy three yen contracts at a quote of 1.0180 and sell them a few months later at 1.0365 (12,500,000 yen per contr
> Using settlement or closing prices from Figures 15.2 and 15.3, find the value of the following commodities and financial futures contracts. a. December 2018 corn b. March 2019 corn c. September 2018 Canadian dollar d. December 2018 Treasury bonds e. Sep
> Three of the biggest U.S. commodities exchanges—the CME, CBOT, and NYMEX—were identified in this chapter. Other U.S. exchanges and several foreign commodities exchanges are also closely followed in the United States. Go to the Wall Street Journal Online,
> Assume you hold a well-balanced portfolio of common stocks. Under what conditions might you want to use a stock-index (or ETF) option to hedge the portfolio? a. Briefly explain how such options could be used to hedge a portfolio against a drop in the mar
> Alcan stock recently closed at $52.51. Assume that you write a covered call on Alcan by writing one September call with a strike price of $55 and buying 100 shares of stock at the market price. The option premium that you obtain from writing the call is
> Notice that among the options expiring in one month, the option with the highest time value is the one with a strike price of $70. Likewise, among the options expiring in three months, the option with a $70 strike has more time value than the options wit
> Using the Facebook stock option quotations in Figure 14.1, find the option premium, the time value, and the stock index breakeven point for the following puts and calls. a. The August put with a strike price of $82.50 b. The August call with a strike pri
> In the absence of any load charges, open-end mutual funds are priced at (or very close to) their net asset values, whereas closed-end funds rarely trade at their NAVs. Explain why one type of fund would normally trade at its NAV while the other type (CEF
> For each pair of funds listed, select the one that is likely to be less risky. Briefly explain your answer. a. Growth versus growth-and-income funds b. Equity-income versus high-grade corporate bond funds c. Balanced versus sector funds d. Global versus
> For each of the following initial investment amounts, calculate the future value at the end of the investment period if interest compounds annually.
> Describe the process of creating an ETF. How does it differ from the process by which an open-end fund is created?
> Contrast mutual fund ownership with direct investment in stocks and bonds. Assume your class is going to debate the merits of investing through mutual funds versus investing directly in stocks and bonds. Develop some arguments on each side of this debate
> Assume that an investor comes to you looking for advice. She has $200,000 to invest and wants to put it all into bonds. a. If she considers herself a fairly aggressive investor who is willing to take the risks necessary to generate the big returns, what
> Briefly explain what will happen to a bond’s duration in each of the following situations. a. The yield to maturity on the bond falls from 8.5% to 8%. b. The bond gets one year closer to its maturity. c. Market interest rates go from 8% to 9%. d. The bon
> Using the Wall Street Journal, Barron’s, or an online source, find the bond yields for Treasury securities with the following maturities: 3 months, 6 months, 1 year, 3 years, 5 years, 10 years, 15 years, and 20 years. Construct a yield curve based on the
> Briefly describe each of the following theories of the term structure of interest rates. a. Expectations hypothesis b. Liquidity preference theory c. Market segmentation theory According to these theories, what conditions would result in a downward-slopi
> Using the resources at your campus or public library or on the Internet, find the information requested below. a. Select any two convertible debentures (notes or bonds) and determine the conversion ratio, conversion parity, conversion value, conversion p
> Describe LYONs, and note how they differ from conventional convertible securities. Are there any similarities between LYONs and conventional convertibles? Explain.
> Why do companies like to issue convertible securities? What’s in it for them?
> Select the security in the left-hand column that best fits the investor’s desire described in the right-hand column. a. Five-year Treasury note b. A bond with a low coupon and a long maturity c. Yankee bond d. Insured revenue bond e. Long-term Treasury s
> 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
> “Treasury securities are guaranteed by the U.S. government. Therefore, there is no risk in the ownership of such bonds.” Briefly discuss the wisdom (or folly) of this statement.
> Identify and briefly describe each of the following types of bonds. a. Agency bonds b. Municipal bonds c. Zero-coupon bonds d. Junk bonds e. Foreign bonds f. Collateralized mortgage obligations (CMOs) What type of investor do you think would be most attr
> Using the bond returns in Table 10.1 as a basis of discussion: a. Compare the total returns on Treasury bonds during the 1970s with those produced in the 1980s. How do you explain the differences? b. How did the bond market do in the 1990s? How does the
> Describe each of the following approaches to technical analysis, and note how it would be used by investors. a. Confidence index b. Arms index c. Odd-lot trading d. Charting e. Moving averages f. On-balance volume Which of these approaches is likely to i
> Briefly describe how technical analysis is used as part of the stock valuation process. What role does it play in an investor’s decision to buy or sell a stock?
> Describe how representativeness may lead to biases in stock valuation.
> Briefly define each of the following terms, and describe how it can affect investors’ decisions. a. Loss aversion b. Representativeness c. Narrow framing d. Overconfidence e. Biased self-attribution
> You look at a large number of firms that announced higher-than-expected sales growth and notice that the stocks of these firms were rising quickly prior to these public announcements. Does that violate market efficiency?
> Suppose you look back over the past 10 years and identify firms that have increased dividends every year. You notice that these stocks outperformed the broader market over the decade too. Does this violate efficient markets? Do you think buying stocks ba
> If small stocks outperform large stocks, does that violate market efficiency? If yes, why? If not, what else would have to be true to conclude that the pattern did violate market efficiency?
> Calculate the following. a. The present value of $500 to be received four years from now, using an 11% discount rate. b. The present value of the following end-of-year income streams, using a 9% discount rate and assuming it is now the beginning of 2020
> Erin McQueen purchased 50 shares of BMW, a German stock traded on the Frankfurt Exchange, for €85.5 (euros) per share exactly one year ago when the exchange rate was 1.10$/€ (i.e, €1 was worth $1.10). Today the stock is trading at €87.10 per share, and t
> Each year the financial media publishes lists of the top-performing mutual fund managers. And every year there are some fund managers who earn much higher returns than the market average, and in some cases they do so without taking above-average risk. Is
> Briefly define each of the following, and note the conditions that would suggest the market is technically strong. a. Breadth of the market b. Short interest c. Relative strength index d. Theory of contrary opinion e. Head and shoulders
> Much has been written about the concept of an efficient market. It’s probably safe to say that some of your classmates believe the markets are efficient and others believe they are not. Have a debate to see whether you can resolve this issue (at least am
> Assume an investor uses the constant-growth DVM to value a stock. Listed are various situations that could affect the computed value of a stock. Look at each one of these individually and indicate whether it would cause the computed value of a stock to g
> Explain the role that the future plays in stock valuation. Why not base the valuation solely on historical information? Explain how a stock’s intrinsic value relates to its required return. Illustrate what happens to a stock’s value when the required ret
> In this chapter, we examined nine stock valuation procedures: • Zero-growth DVM • Constant-growth DVM • Variable-growth DVM • Free cash flow to equity approach • Expected return (IRR) approach • P/E approach • Price-to-cash-flow ratio • Price-to-sales ra
> Select a company from Yahoo! Finance or another online source. (Hint: Pick a company that’s been publicly traded for at least 10 years, and avoid public utilities, banks, and other financial institutions.) Using the historical and forecasted data reporte
> Match the specific ratios in the left-hand column with the category in the right-hand column to which it belongs. a. Inventory turnover b. Debt-equity ratio c. Current ratio d. Net profit margin e. Return on assets f. Total asset turnover g. Price-to-ear
> As an investor, what kind(s) of economic information would you look for if you were thinking about investing in the following? a. An airline stock b. A cyclical stock c. An electrical utility stock d. A building materials stock e. An aerospace firm, with
> Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, identify each of the following and note how each would probably behave in a strong economy. a. Fiscal policy b. Interest rates c. In
> 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
> Briefly define each of the following types of investment programs and note the kinds of stock (blue chips, speculative stocks, etc.) that would best fit with each. a. A buy-and-hold strategy b. A current-income portfolio c. Long-term total return d. Aggr
> Identify and briefly describe the three sources of return to U.S. investors in foreign stocks. How important are currency exchange rates? With regard to currency exchange rates, when is the best time to be in foreign securities? a. Listed are exchange ra
> Assume that a wealthy woman comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she can over a 15-year period and is willing to tolerate a “fair amount
> Given the information in Figure 6.4, answer the following questions for Netflix. a. On what day did the trading activity occur? b. At what price did the stock sell when the market closed? c. What is the firm’s price-to-earnings ratio? What does that indi
> Look at the record of stock returns in Table 6.1. a. How would you compare the average annual returns for the various decades? b. Considering the average annual returns that have been generated over holding periods of 10 years or more, what rate of retur
> Search online to find forecasts of the U.S. inflation rate for next year. Also find the current interest rate paid by one-year Treasury bills (this will be the nominal rate of interest for that type of security). Use the data to estimate the current real
> 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 investm
> Choose a publicly traded company that has been listed on a major exchange or in the over-the-counter market for at least five years. Use any data source of your choice to find the annual cash dividend, if any, paid by the company in each of the past five
> 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
> Differentiate between the financial advice you would receive from a traditional investment advisor and one of the new robo-advisors. Which would you prefer to use, and why? How could membership in an investment club serve as an alternative to a paid inve
> Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money. a.
> Thomas Weisel, chief executive of a securities firm that bears his name, believes that individual investors already have too much information. “Many lose money by trading excessively on stray data,” he says. Other industry professionals oppose the SEC’s
> 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 2017, the average IPO rose by 18.4% 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 und
> In most developed countries, prices of goods and services tend to rise over time, an economic phenomenon known as inflation. Of course, prices of some goods, such as consumer electronics, tend to fall as time passes, but from one year to the next, the ov
