Question: Investor A buys 100 shares of SLM

> You are given the following information: a) What are the expected returns and standard deviations of a portfolio consisting of: 1. 100 percent in stock A? 2. 100 percent in stock B? 3. 50 percent in each stock? 4. 25 percent in stock A and 75 percent in

> You are given the following information concerning two stocks: a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B? b) What is the standard deviation of this portfolio? c) Discuss the risk and retu

> A portfolio consists of assets with the following expected returns a) What is the expected return on the portfolio? b) What will be the expected return if the individual reduces the holdings of the AT&T stock to 15 percent and puts the funds into re

> You are considering three stocks with the following expected dividend yields and capital gains: a) What is the expected return on each stock? b) How may transactions costs and capital gains taxes affect your choices among the three securities? Divid

> Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 20 years and for each five-year time period:1993–1997, 1998–2002, 2003–200

> A speculator sells a stock short for $50 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $42. What is the percentage return on the position (excluding the impact of any interest expens

> This problem illustrates how beta coefficients are estimated and uses material covered in the appendix to this chapter. It may be answered using any program that performs linear regression analysis such as Excel. The following information is given: Using

> Using the material on the standard deviation and the coefficient of variation presented in the appendix to this chapter, rank the following investments with regard to risk. a) Investment Returns b) Investment Returns Stock A Stock B Stock A Stock B

> You are considering purchasing two stocks with the following possible returns and probabilities of occurrence: Compare the expected returns and risk (as measured by the standard deviations) of each investment. Which investment offers the higher expected

> What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock’s beta is 1.5? If the beta had been 2.0, what would be the return? Is this higher return consist

> What is the beta of a portfolio consisting of one share of each of the following stocks, given their respective prices and beta coefficients? How would the portfolio beta differ if (a) the investor purchased 200 shares of stocks B and C for every 100 sh

> Floria Scarpia believes that many of her clients could benefit from using international investments to diversify their portfolios, but many are reluctant to invest abroad—especially since they may be unfamiliar with foreign economies an

> Although investing requires the individual to bear risk, the risk can be controlled through the construction of diversified portfolios and by excluding any portfolio that offers an inferior return for a given amount of risk. While this concept seems obvi

> In Chapter 1, you selected ten stocks and invested $10,000 in each. This assignment adds to what you have already done. a. What does your portfolio’s beta coefficient tell you about the tendency of the portfolio to move with the market? b. Find the beta

> What is a capital gain, and is it subject to taxation? May capital losses be used to offset capital gains and income from other sources?

> What is a tax shelter? Does a tax shelter imply that the individual avoids paying taxes?

> An investor sells a stock short for $36 a share. A year later, the investor covers the position at $30 a share. If the margin requirement is 60 percent, what is the percentage return earned on the investment? Redo the calculations, assuming the price of

> What is the difference between an individual’s forecasted balance sheet and forecasted cash budget? Which of the following should be part of an individual’s balance sheet and which should be part of the cash budget? a) Mortgage b) Principal repayment to

> What are the steps for constructing a financial plan? What role do financial statements play in the construction of financial plans?

> What are the three forms of the efficient market hypothesis? What are possible exceptions (anomalies) to the efficient market hypothesis?

> Does the efficient market hypothesis suggest that an investor cannot outperform the market? What effect does the dissemination of information (as required by the full disclosure laws) have on the efficiency of financial markets? How rapidly do securities

> Taxes affect financial planning. Go to an Internet site such as the IRS website (www.irs.ustreas.gov) and answer the following questions. Other possible sites include TurboTax (www.turbotax.intuit.com) or 1040.com (www.1040.com). a) What are the margina

> What differentiates a deductible IRA from a Roth IRA? What conditions favor the Roth IRA?

> What are IRA, 401(k), and Keogh plans? What are their primary advantages for investors?

> Which of the following illustrates a tax shelter? a) Dividend income b) Interest earned on a savings account c) A stock purchased for $10 that is currently worth $25 d) An IRA e) A Roth account f) The sale of a stock purchased in 2005 for a $1,000 capita

> You are in the 25 percent income tax bracket. What are the taxes owed or saved if you a) Contribute $2,000 to a 401(k) plan b) Contribute $2,000 to a Roth IRA c) Withdraw $2,000 from a traditional IRA d) Withdraw $2,000 from a Keogh account

> You are in the 28 percent income tax bracket and pay long-term capital gains taxes of 15 percent. What are the taxes owed or saved in the current year for each of the following sets of transactions? a) You buy 100 shares of ZYX for $10 and after seven mo

> Ms. Tejal Gandhi has decided that the stock of Small Cap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when

> An investor is in the 33 percent tax bracket and pays long-term capital gains taxes of 15 percent. What are the taxes owed (or saved in the case of losses) in the current tax year for each of the following situations? a) Net short-term capital gains of $

> a) An individual in the 28 percent federal income tax bracket and 15 percent long-term capital gains tax bracket bought and sold the following securities during the year: What are the taxes owed on the short-term capital gains? b) An individual in the 35

> Bob and Barbara are 55 and 50 years old. Bob annually contributes $1,500 to Barbara’s IRA. They plan to make contributions until Bob retires at age 65 and then to leave the funds in as long as possible (i.e., age 70 to ease calculations). Mike and Mary a

> Bob places $1,000 a year in his IRA for ten years and then invests $2,000 a year for the next ten years. Mary places $2,000 a year in her IRA for ten years and then invests $1,000 a year for the next ten years. They both have invested $30,000. If they ea

> You are 60 years old. Currently, you have $10,000 invested in an IRA and have just received a lump-sum distribution of $50,000 from a pension plan, which you roll over into an IRA. You continue to make $2,000 annual payments to the regular IRA and expect

> For 20 years through age 66, you contribute $3,000 to your 401(k) plan and earn 6 percent annually. If you are in the 20 percent income tax bracket, what will be your annual tax obligation when you withdraw the funds for the next 15 years if your funds c

> Your traditional IRA account has stock of GFH, which cost $2,000 20 years ago when you were 50 years old. You have been very fortunate, and the stock is now worth $23,000. You are in the 35 percent income tax bracket and pay 15 percent on long-term capit

> Your financial planning practice services several sophisticated individuals who have accumulated a substantial amount of assets but who are naïve concerning potential strategies to reduce taxes To increase their awareness, one client suggested that you o

> As is explained in subsequent chapters, increases in interest rates cause the value of assets to decline. Why would you expect this relationship?

> What is the difference between compounding (the determination of future value) and discounting (the determination of present value)?

> Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $5 a share are distributed. Commissions are 2 perce

> What is the difference between a lump-sum payment and an annuity? What is the difference between an ordinary annuity and an annuity due? Are all series of payments annuities?

> For a given time period, what happens to the following as the interest rate increases? a) Future value of $1 b) Future value of an annuity c) Present value of $1 d) Present value of an annuity

> For a given interest rate, what happens to the following as time increases? a) Future value of $1 b) Future value of an annuity c) Present value of $1 d) Present value of an annuity

> A person who is retiring at age 65 and who has $200,000 wants to leave an estate of at least $30,000. How much can the individual draw annually on the $200,000 (starting at the end of the year) if the funds earn 8 percent and the person’s life expectancy

> Graduating seniors may earn $45,000. If the annual rate of inflation is 2 percent, what must these graduates earn after 20 years to maintain their current purchasing power? If the rate of inflation rises to 4 percent, will they be maintaining their stand

> An investment offers $10,000 per year for 20 years. If an investor can earn 6 percent annually on other investments, what is the current value of this investment? If its current price is $120,000, should the investor buy it

> A saver wants $100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds. a) What amount must be invested each year to accumulate $100,000 if (1) the payments are made at the beginning of each year or

> At the end of each year a self-employed person deposits $1,500 in a retirement account that earns 7 percent annually. a) How much will be in the account when the individual retires at the age of 65 if the contributions start when the person is 45 years o

> A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year pays 4 percent interest, which is compounded annually until the certificate matures. a) How much interest will the saver earn if the interest is left to accu

> A widower currently has $107,500 yielding 8 percent annually. Can he withdraw $18,234 a year for the next 10 years? If he cannot, what return must he earn in order to withdraw $18,234 annually?

> You have an elderly aunt, Aunt Kitty, who has just sold her house for $365,000 and entered a retirement community that charges $100,000 annually. If she can earn 6 percent on her funds, how long will the funds from the sale of the house cover the cost of

> Suppose you purchase a home for $350,000. After making a down payment of $50,000, you borrow the balance through a mortgage loan at 8 percent for 20 years. What is the annual payment required by the mortgage? If you could get a loan for 25 years but had

> A township expects its population of 5,000 to grow annually at the rate of 5 percent. The township currently spends $300 per inhabitant, but, as the result of inflation and wage increments, expects the per capita expenditure to grow annually by 7 percent

> You are promised $10,000 a year for six years after which you will receive $5,000 a year for six years. If you can earn 8 percent annually, what is the present value of this stream of payments?

> You invest $1,000 a year for ten years at 6 percent and then invest $2,000 a year for an additional ten years at 6 percent. How much will you have accumulated at the end of the 20 years?

> You purchase a $1,000 asset for $800. It pays $60 a year for seven years at which time you receive the $1,000 principal. Prove that the annual return on this investment is not 9 percent.

> You are offered an annuity of $12,000 a year for 15 years. The annuity payments start after five years have elapsed. If the annuity costs $75,000, is the annuity a good purchase if you can earn 7 percent on invested funds?

> You purchase a $100,000 life insurance policy for a single payment of $35,000. If you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior alternative? If you die within ten years, what is the return on

> At the end of each year, Tom invests $2,000 in a retirement account. Joan also invests $2,000 in a retirement account but makes her deposits at the beginning of each year. They both earn 9 percent on their funds. How much will each have in his or her acc

> The following questions illustrate non annual compounding. a) One hundred dollars is placed in an account that pays 12 percent. How much will be in the account after one year if interest is compounded annually, semiannually, or monthly? b) One hundred do

> You purchase 100 shares of stock at $100 ($10,000); the margin requirement is 40percent. What are the dollar and percentage returns if a) You sell the stock for $112 and bought the stock for cash? b) You sell the stock for $90 and bought the stock on mar

> You are offered $900 five years from now or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? If you can earn 14 percent on your funds, which offer will you accept? Why are your an

> A 40-year-old individual establishes a retirement account that is expected to earn 7 percent annually. Contributions will be $2,000 annually at the beginning of each year. Initially, the saver expects to start drawing on the account at age 60. a) How muc

> The preceding problems can be solved using the interest tables supplied in Appendix A. To test your ability to construct your own interest factors or to use a financial calculator, solve the following problems. a) You place $1,300 in a savings account th

> The “Rule of 72” is a shortcut method to answer this question, “How long will it take to double my money if i earn a specified percentage such as 10 percent? Divide 72 by the rate, and the rule gives you an approximation of the years: 72⁄10 5 7.2 years.

> Care facilities are expensive. Your mother wants a single room with her own bathroom. The annual estimated cost is $100,000, but your mother does not anticipate entering the facility for four years. Her life expectancy when she enters the facility will b

> You purchase a stock for $50 and sell the stock for $70 after three years. a) What is the annual return on your investment if you bought the stock in a cash account? b) What is the annual return on your investment if you bought the stock on margin and th

> Which is the better choice when purchasing a $30,000 car: a) A four-year loan at 6 percent, b) An immediate rebate of $2,000 and a four-year loan at 8 percent?

> Your first child is now a 1-year-old. Tuition currently costs $60,000 to attend a public college for four years. If these costs rise 5 percent annually, how much must you invest each year to cover the expenses after 18 years if you are able to earn 10 pe

> You have accumulated $325,000 in a retirement account and continue to earn 8 percent on invested funds. a) What amount may you withdraw annually starting today based on a life expectancy of 20 years? How much will be in the account at the end of the firs

> You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much additional money must you set aside each year if these funds also earn 7 percent in order to meet you

> Repeat Problem 1 to determine the percentage return on your investment but in this case suppose the price of the stock falls to $7.50 per share. What generalization can be inferred from your answers to Problems 1 and 2? Data from Problem 1: A stock sell

> Erin O’Reilly was recently employed by the human resources department of a moderate-sized engineering firm. Management is considering the adoption of a defined-benefit pension plan in which the firm will pay 75 percent of an individual’s last annual sala

> The following questions concern short selling: a) When should an investor sell short? b) How can investors sell stock they do not own? c) How is a short position closed? d) How does the investor profit from a short sale? e) What is the risk associated wi

> Why is it riskier to buy stock on margin?

> When would you use a stop-loss order?

> 1. What is the difference between each pair of items? a) Listed and unlisted securities b) Brokers and market makers c) Full-service and discount brokerage firms d) Primary and secondary markets e) Market order and good-till-canceled order f) Cash accoun

> Groupon (GRPN) went public at $20 a share and closed the first day at $26.11. Zynga (ZNGA) went public at $10 a share but closed the first day at $9.50. Facebook (FB) went public in 2012 at $38. While the price did initially pop to $42, the stock was tra

> The text used Ariba (ARBA) and Ask Jeeves as illustrations of stocks that soared after the IPO, only to decline dramatically in subsequent trading. Suppose investor A bought 100 shares of Ariba at the IPO price of $28.24, investor B bought 100 shares on

> What is the difference between an underwriting and a “best-efforts” sale of securities? Who bears the risk associated with each sale? If the investment banker overprices a new issue of securities, who sustains the losses?

> If a mutual fund’s net asset value is $23.40 and the fund sells its shares for $25, what is the load fee as a percentage of the net asset value?

> What is the net asset value of an investment company with $10,000,000 in assets, $790,000 in current liabilities, and 1,200,000 shares outstanding?

> In an underwriting, what role does each of the following play? a) The investment banker b) The syndicate c) The preliminary and final prospectus d) The SEC

> An investor buys shares in a mutual fund for $20 per share. At the end of the year the fund distributes a dividend of $0.58, and after the distribution the net asset value of a share is $23.41. What would be the investor’s percentage return on the invest

> What advantage do “families” of funds offer?

> What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?

> What is a loading charge? Do all investment companies charge this fee?

> Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?

> How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?

> How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?

> Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?

> What are the differences among loading fees, exit fees, and 12b-1 fees?

> Should an investor expect a mutual fund to outperform the market? If not, why should the investor buy the shares?

> How are the SIPC and FDIC similar? Why are securities laws frequently referred to as “full disclosure laws,” and what is the role of the SEC?

> The Kelleher brothers, Victor and Darin, could not be more different. Victor is assertive and enjoys Taking risks, while Darin is reserved and is exceedingly risk averse. Both have jobs that pay well and provide fringe benefits, including medical insuran

> Compute total assets for Romney’s Marketing Company based on the adjusted trial balance in Mini Exercise 8. Then compute the company’s total asset turnover (rounded to two decimal places) for the current year, assuming total assets at the e

> Prepare journal entries for each transaction listed in Mini Exercise 5. Data from Mini Exercise 5: Using the following categories, indicate the effects of the following transactions. Use + for increase and- for decrease and indicate the accounts af

> Given the transactions in Mini Exercise 7 and Mini Exercise 8, prepare an income statement for Craig’s Bowling, Inc., for the month of July. Transactions in Mini Exercise 7: Balance Sheet Income Statement   Assets Liabilities Stockholders’ Equ

> Using the following categories, indicate the effects of the following transactions. Use + for increase and- for decrease and indicate the accounts affected and the amounts. a. Sales on account were $1,800 and related cost of goods sold was $1,200. b. Iss

> Saunders, Inc., recently reported the following December 31 amounts in its financial statements (dollars in thousands): Compute return on assets for the current year. What does this ratio measure? Current Year Prior Year Gross profit $ 200 $120 Net i

> For each of the transactions in Mini Exercise 3, write the journal entry in good form. Transactions in Mini Exercise 3:  Revenue Account Affected  Amount of Revenue Earned in July  a. Games Revenue $15,000  b. Sales Revenue $8,000  c.