Question: In the United States, what is the

> You found the following stock quote for DRK Enterprises, Inc., at your favorite website. You also found that the stock paid an annual dividend of $0.75, which resulted in a dividend yield of 1.30 percent. What was the closing price for this stock yesterd

> Suppose you bought 100 shares of stock at an initial price of $37 per share. The stock paid a dividend of $0.28 per share during the following year, and the share price at the end of the year was $41. Compute your total dollar return on this investment.

> Referring to Figure 14.1, what is the total open interest on the December 2015 Japanese yen contract? Does it represent long positions, short positions, or both? Based on the settle price on the contract, what is the dollar value of the open interest? F

> Using Figure 14.1, answer the following questions: a. What was the settle price for March 2016 coffee futures on this date? What is the total dollar value of this contract at the close of trading for the day? b. What was the settle price for December 201

> A stock has a beta of 0.9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.5, w

> Consider the following information: a. Your portfolio is invested 25 percent each in A and C and 50 percent in B. What is the expected return of the portfolio? b. What is the variance of this portfolio? The standard deviation? Rate of Return If S

> Based on the following information, calculate the expected return and standard deviation for the two stocks. Rate of Return If State Occurs State of Probablity of State of Economy Economy Stock A Stock B Recession .3 0.04 -0.20 Normal .4 0.09 0.13

> Calculate the expected return on a portfolio of 55 percent Roll and 45 percent Ross by filling in the following table: Data for Question 7: (1) (4) (2) Probablity of State of Economy (3) Portfollo Return State of Product Economy If State Occurs (2

> Calculate the standard deviations for Roll and Ross by filling in the following table (verify your answer using returns expressed in percentages as well as decimals): Data for Question 5: (1) (2) Probablity of State of Economy (3) (4) Squared Ret

> A study analyzed the behavior of the stock prices of firms that had lost antitrust cases. Included in the diagram are all firms that lost the initial court decision, even if the decision was later overturned on appeal. The event at time 0 is the initial,

> An important difference between a long position in stock and a short position concerns the potential gains and losses. Suppose a stock sells for $18 per share and you buy 500 shares. What are your potential gains and losses?

> The following figures present the results of four cumulative abnormal returns (CAR) studies. Indicate whether the results of each study support, reject, or are inconclusive about the semi strong form of the efficient markets hypothesis. In ea

> The following diagram shows the cumulative abnormal returns (CAR) for oil exploration companies announcing oil discoveries over a 30-year period. Month 0 in the diagram is the announcement month. Assume that no other information is received and the stock

> On November 14, Thoro good Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous sever

> Suppose you calculated the total market value of the stocks in an index over a five-year period: Year 1: 4,387 million Year 2: 4,671 million Year 3: 5,032 million Year 4: 4,820 million Year 5: 5,369 million Suppose you wanted the index to start at 1,000.

> You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85. If the stock price at expiration is $82, what is your dollar profit? What if the stock price is $72?

> Using the information from Problem 5, calculate the variances and the standard deviations for Cherry and Straw.

> Calculate the index return for the information in Problem 4 using a value-weighted index.

> To an investor, what is the difference between using an advisor and using a broker?

> What is Blume’s formula? When would you want to use it in practice?

> What is the difference between arithmetic and geometric returns? Suppose you have invested in a stock for the last 10 years. Which number is more important to you, the arithmetic or geometric return?

> Explain how volume is quoted for stocks, corporate bonds, futures, and options.

> Why is preferred stock “preferred”?

> What does it mean to sell a security short? Why might you do it?

> What does it mean to purchase a security on margin? Why might you do it?

> Program traders closely monitor relative futures and cash market prices, but program trades are not actually made on a fully mechanical basis. What are some of the complications that might make program trading using, for example, the S&P 500 contract mor

> Is it true that a futures contract represents a zero-sum game, meaning that the only way for a buyer to win is for a seller to lose, and vice versa?

> An American electronics firm imports its completed circuit boards from Japan. The company signed a contract today to pay for the boards in Japanese yen upon delivery in four months; the price per board in yen was fixed in the contract. Should the importe

> What are the similarities and differences in taking the short side of a futures contract and short selling a stock? How do the cash flows differ?

> Using Figure 14.1, answer the following questions: a. How many exchanges trade wheat futures contracts? b. If you have a position in 10 gold futures, what quantity of gold underlies your position? c. If you are short 20 oat futures contracts and you opt

> What is the difference between the Sharpe ratio and the Sortino ratio?

> Suppose that two investments have the same alpha. What things might you consider to help you determine which investment to choose?

> Which of the following represents the best investment advice? a. Avoid Texas because its expected return is lower than its required return. b. Buy Montana and Texas because their required returns are lower than their expected returns. c. Buy Montana beca

> Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true? Why would we expect that all assets have the same reward-to-risk ratio in liquid, well-functioning markets?

> Suppose you identify a situation in which one security is overvalued relative to another. How would you go about exploiting this opportunity? Does it matter if the two securities are both overvalued relative to some third security? Are your profits certa

> Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on s

> As indicated by examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods. If the market valu

> Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price. a. The government announces that inflation unexpectedly jumped by 2 percent last month. b. Big Wid

> Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, compared to 5 percent for the year just completed. Will security prices increase, decrease, or stay the

> Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 securities drawn from several industries. After the meeting concluded, the client made the following statement: “I trust your stock-picking ability an

> In broad terms, why is some risk diversifiable? Why are some risks non diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio but not the level of systematic risk?

> Why is the minimum variance portfolio important in regard to the Markowitz efficient frontier?

> Why should younger investors be willing to hold a larger amount of equity in their portfolios?

> Look at Table 1.1 and Figures 1.5 and 1.6. When were T-bill rates at their highest? Why do you think they were so high during this period? Table 1.1: Figures 1.5: Figures 1.6: TABLE 11 Year-to-Year Total Returns: 1926-2015 LONG-TERM LONG-TE

> (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium b

> Suppose you buy a 9 percent coupon, 15-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

> Is the yield to maturity (YTM) on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose that today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. Wha

> What is the difference between a bond’s promised yield and its realized yield? Which is more relevant? When we calculate a bond’s yield to maturity, which of these are we calculating?

> For a premium bond, which is greater, the coupon rate or the yield to maturity? Why? For a discount bond? Why?

> For callable bonds, the financial press generally reports either the yield to maturity or the yield to call. Often yield to call is reported for premium bonds, and yield to maturity is reported for discount bonds. What is the reasoning behind this conven

> When we observe interest rates in the financial press, do we see nominal or real rates? Which are more relevant to investors?

> Compare and contrast the Fed funds rate and the discount rate. Which do you think is more volatile? Which market do you think is more active? Why?

> Discuss how each of the following theories for the term structure of interest rates could account for a downward-sloping term structure of interest rates: a. Pure expectations b. Maturity preference c. Market segmentation

> When combined with Beta Naught in a 50/50 portfolio, which of the other three funds will produce a portfolio that has the lowest standard deviation? a. New Horizon only. b. Quality Commodity only. c. Either Hi Rise or Quality Commodity.

> Based on the history of interest rates, what is the range of short-term rates that has occurred in the United States? The range of long-term rates? What is a typical value for each?

> In the chapter, we discussed the 3Com/Palm and Royal Dutch/ Shell mis pricings. Which of the limits to arbitrage would least likely be the main reason for these mis pricings? Explain.

> Why do you think the industrial and transportation averages are the two that underlie Dow theory?

> What is noise trader risk? How can noise trader risk lead to market inefficiencies?

> How can frame dependence lead to irrational investment decisions?

> How do prospect theory and the concept of a rational investor differ?

> Gaps are another technical analysis tool used in conjunction with open high-low-close charts. A gap occurs when either the low price for a particular day is higher than the high price from the previous day, or the high price for a day is lower than the l

> A frequent argument against the usefulness of technical analysis is that trading on a pattern has the effect of destroying the pattern. Explain what this means.

> Which of the following statements are true about the efficient markets hypothesis? a. It implies perfect forecasting ability. b. It implies that prices reflect all available information. c. It implies an irrational market. d. It implies that prices do no

> You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10 percent. Does this mean that the market is inefficient?

> Based on the information in the case, which one of the following portfolios should the Analees choose? a. Portfolio A b. Portfolio B c. Portfolio C Allocation Expected Return Portfolio A Portfolio B Portfolio C U.S. large stocks U.S. small stocks 9

> A hundred years ago or so, companies did not compile annual reports. Even if you owned stock in a particular company, you were unlikely to be allowed to see the balance sheet and income statement for the company. Assuming the market is semi strong-form e

> In the mid- to late-1990s, the performance of the pros was unusually poor—on the order of 90 percent of all equity mutual funds underperformed a passively managed index fund. How does this bear on the issue of market efficiency?

> For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak-form efficient, (2) the market is weak-form but not semi strong-form efficient, (3)

> Several celebrated investors and stock pickers have recorded huge returns on their investments over the past two decades. Is the success of these particular investors an invalidation of an efficient stock market? Explain.

> Prospectors, Inc., is a publicly traded gold prospecting company in Alaska. Although the firm’s searches for gold usually fail, the prospectors occasionally find a rich vein of ore. What pattern would you expect to observe for Prospectors’ cumulative abn

> Suppose the market is semi strong-form efficient. Can you expect to earn abnormal returns if you make trades based on a. Your broker’s information about record earnings for a stock? b. Rumors about a merger of a firm? c. Yesterday’s announcement of a suc

> The Durkin Investing Agency has been the best stock picker in the country for the past two years. Before this rise to fame occurred, the Durkin newsletter had 200 subscribers. Those subscribers beat the market consistently, earning substantially higher r

> Trans Trust Corp. has changed how it accounts for inventory. Taxes are unaffected, although the resulting earnings report released this quarter is 20 percent higher than what it would have been under the old accounting system. There is no other surprise

> New tech Corp. is going to adopt a new chip testing device that can greatly improve its production efficiency. Do you think the lead engineer can profit from purchasing the firm’s stock before the news release on the device? After reading the announcemen

> Today, the following announcement was made: “Early today the Justice Department reached a decision in the Universal Product Care (UPC) case. UPC has been found guilty of discriminatory practices in hiring. For the next five years, UPC must pay $2 million

> What is their tolerance for risk? a. Average b. Below average c. Above average

> When the 56-year-old founder of Gulf & Western, Inc., died of a heart attack, the stock price immediately jumped from $18.00 a share to $20.25, a 12.5 percent increase. This is evidence of market inefficiency because an efficient stock market would have

> Aero tech, an aerospace technology research firm, announced this morning that it hired the world’s most knowledgeable and prolific space researchers. Before today, Aero tech’s stock had been selling for $100. Assume that no other information is received

> Based on the dividend growth models presented in the chapter, what are the two components of the total return of a share of stock? Which do you think is typically larger?

> You have $100,000 to invest in a portfolio containing stock X, stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 13 percent and that has only 70 percent of the risk of the

> Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.

> In Problem 12, what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? Data from Problem 12: Stock Y has a beta of 1.05 and an expected return of 13 percent. Stock Z has a beta of 0.70 and an expected

> As a practical matter, most of the return you earn from investing in Treasury bills is taxed right away as ordinary income. Thus, if you are in a 40 percent tax bracket and you earn 5 percent on a Treasury bill, your after-tax return is only 0.05 × (1 −

> The returns we have examined are not adjusted for taxes. What do you suppose would happen to our estimated returns and risk premiums if we did account for taxes? What would happen to our volatility measures?

> The returns we have examined are not adjusted for inflation. What do you suppose would happen to our estimated risk premiums if we did account for inflation?

> What is the reason margin requirements exist?

> Are market timing and tactical asset allocation similar? Why or why not?

> What is the difference between asset allocation and security selection?

> Under what two assumptions can we use the constant perpetual growth model presented in the chapter to determine the value of a share of stock? How reasonable are these assumptions?

> What is the probability that the return on small stocks will be less than −100 percent in a single year (think about it)? What are the implications for the distribution of returns?

> A particular stock had a return last year of 4 percent. However, you look at the stock price and notice that it actually didn’t change at all last year. How is this possible?

> How does a high-water mark constrain hedge fund managers from earning excess performance management fees?

> Who actually owns a mutual fund? Who runs it?

> What is the open interest on a futures contract? What do you think will usually happen to open interest as maturity approaches?

> Changes in what price lead to gains and/or losses in futures contracts?

> The current yield on a bond is the coupon rate divided by the price. Thus, it is very similar to what number reported for common and preferred stocks?

> What is the P/E ratio reported for stocks in The Wall Street Journal? In particular, how is it computed?

> What are the distinguishing features of a money market instrument?

> 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?