Using the resources at your campus or public library (or on the Internet), select five mutual funds—a growth fund, an equity-income fund, an international (stock) fund, an index fund, and a high-yield corporate bond fund—that you think would make good investments. Briefly explain why you selected these funds. List the funds’ holding period returns for the past year and their annual compound rates of return for the past three years.
> Is the CAPM a predictive model? Why do beta and the CAPM remain important to investors?
> You have been researching a stock that you like, which is currently trading at $50 per share. You would like to buy the stock if it were a little less expensive—say, $47 per share. You believe that the stock price will go to $70 by year-end and then leve
> Differentiate between a bull market and a bear market.
> What are the third and fourth markets?
> Imagine that the Mini-Dow Average (MDA) is based on the closing prices of five stocks. The divisor used in the calculation of the MDA is currently 0.765. The closing prices for each of the five stocks in the MDA today and exactly one year ago, when the d
> What is the purpose of stock valuation? What role does intrinsic value play in the stock valuation process?
> Identify the three major parts of security analysis and explain why security analysis is important to the stock selection process.
> What is the purpose of technical analysis? Explain how and why it is used by technicians; note how it can be helpful in timing investment decisions.
> Identify and briefly discuss two ways to use stock-index options. Do the same for foreign currency options.
> Kim and Kanye have been dating for years and are now thinking about getting married. As a financially sophisticated couple, they want to think through the tax implications of their potential union. a. Suppose Kim and Kanye both earn $70,000 (so their com
> Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income) 2. $1,000 in interest income 3. $3,000 in dividend income 4. $2,0
> Jason and Kerri Consalvo, both in their 50s, have $50,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per share and pays dividends of $2 per share per year. No
> What benefits does an investment club offer the small investor? Would you prefer to join a regular or an online club, and why?
> Angel and Marie Perez own a small pool hall located in southern New Jersey. They enjoy running the business, which they have owned for nearly three years. Angel, a retired professional pool shooter, saved for nearly 10 years to buy this business, which h
> During 2015, the Smiths and the Joneses both filed joint tax returns. For the tax year ended December 31, 2015, the Smiths’ taxable income was $130,000, and the Joneses had total taxable income of $65,000. a. Using the federal tax rates given in Table 1.
> Stefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumulate $500,000 over the next 25 years to supplement the retirement programs that are being funded by the federal government and her employer. She expects to earn an ave
> A wealthy investor holds $500,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 105% of par. The investor is concerned, however, that rates are headed up over the next six months, and he would like to do something to protect thi
> Tori Reynolds has been an avid stock market investor for years. She manages her portfolio fairly aggressively and likes to short sell whenever the opportunity presents itself. Recently, she has become fascinated with stock index futures, especially the i
> You were just notified that you will receive $100,000 in two months from the estate of a deceased relative. You want to invest this money in safe, interest-bearing instruments, so you decide to purchase five-year Treasury notes. You believe, however, tha
> Briefly describe the differences and similarities between stock-index options and stock options. Do the same for foreign currency options and stock options.
> Briefly explain how behavioral finance can affect each of the following: a. The trading activity of investors b. The tendency of value stocks to outperform growth stocks c. The tendency of stock prices to drift up (down) after unusually good (bad) earnin
> Taryn Arsenault is a regular commodities speculator. She is currently considering a short position in July oats, which are now trading at 248. Her analysis suggests that July oats should be trading at about 240 in a couple of months. Assuming that her ex
> With regard to futures options, how much profit would an investor make if she bought a call option on gold at 7.20 when gold was trading at $482 an ounce, given that the price of gold went up to $525 an ounce by the expiration date on the call? (Note: As
> An American currency speculator feels strongly that the value of the Canadian dollar is going to fall relative to the U.S. dollar over the short run. If he wants to profit from these expectations, what kind of position (long or short) should he take in C
> Not long ago, Vanessa Woods sold her company for several million dollars. She took some of that money and put it into the stock market. Today Vanessa’s portfolio of bluechip stocks is worth $3.8 million. Vanessa wants to keep her portfolio intact, but sh
> Repeat the analysis of problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of Facebook stock at the time those call prices were quoted, wou
> Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.
> Look at the Facebook option quotes in Figure 14.1, and focus on the call and put options with a strike price of $80. Can you use put-call parity to infer what the market price of Facebook stock must have been when these option prices were quoted? To keep
> Repeat the analysis of problem 14.17 assuming that the volatility of the stock’s return is 40%. Intuitively, would you expect this to cause the call price to rise or fall? By how much does the call price change? Problem 14.17: A stock trades for $45 pe
> A stock trades for $45 per share. A call option on that stock has a strike price of $50 and an expiration date one year in the future. The volatility of the stock’s return is 30%, and the risk-free rate is 2%. What is the Black and Scholes value of this
> What’s the most that can be made from writing calls? Why would an investor want to write covered calls? Explain how you can reduce the risk on an underlying common stock by writing covered calls.
> Suppose the DJIA stands at 11,200. You want to set up a long straddle by purchasing 100 calls and an equal number of puts on the index, both of which expire in three months and have a strike of 112. The put price is listed at $1.65 and the call sells for
> How can behavioral finance have any bearing on investor returns? Do supporters of behavioral finance believe in efficient markets? Explain.
> Angelo Martino just purchased 500 shares of AT&E at $61.50, and he has decided to write covered calls against these stocks. Accordingly, he sells five AT&E calls at their current market price of $5.75. The calls have three months to expiration and carry
> Nick Fitzgerald holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Fitzgerald’s portfolio is $735,000, but he is concerned that the market is heading for a big fall (perhaps as much as 20%) over the next three to s
> Myles Houck holds 600 shares of Lubbock Gas and Light. He bought the stock several years ago at $48.50, and the shares are now trading at $75. Myles is concerned that the market is beginning to soften. He doesn’t want to sell the stock, but he would like
> Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to buy a put option on the S&P 100 Index. The put option h
> Charlotte Smidt bought 2,000 shares of the balanced no-load LaJolla Fund exactly one year and two days ago for an NAV of $8.60 per share. During the year, the fund distributed investment income dividends of $0.32 per share and capital gains dividends of
> Using the data in the following table, assume you are using a variable-ratio plan. You have decided that when the speculative portfolio reaches 60% of the total, you will reduce its proportion to 45%. What action, if any, should you take in time period t
> Identify the four main types of online investment tools. How can they help you become a better investor?
> Portfolio A and Portfolio B had the same holding period return last year. Most of the returns from Portfolio A came from dividends, while most of the returns from Portfolio B came from capital gains. Which portfolio was likely owned by a single working p
> Describe three ways in which investors can use stock options.
> Using the data in the following table, assume you are using a constant-dollar plan with a rebalancing trigger of $1,500. The stock price represents your speculative portfolio, and the MM mutual fund represents your conservative portfolio. What action, if
> Over the past two years, Jonas Cone has used a dollar-cost averaging formula to purchase $300 worth of FCI common stock each month. The price per share paid each month over the two years is given in the following table. Assume that Jonas paid no brokerag
> What are market anomalies and how do they come about? Do they support or refute the EMH? Briefly describe each of the following: a. The January effect b. The size effect c. The value effect
> The risk-free rate is currently 8.1%. Use the data in the accompanying table for the Fio family’s portfolio and the market portfolio during the year just ended to answer the questions that follow. a. Calculate Sharpe’
> Chee Chew’s portfolio has a beta of 1.3 and earned a return of 12.9% during the year just ended. The risk-free rate is currently 4.2%. The return on the market portfolio during the year just ended was 11.0%. a. Calculate Jensen’s measure ( Jensen’s alph
> Niki Malone’s portfolio earned a return of 11.8% during the year just ended. The portfolio’s standard deviation of return was 14.1%. The risk-free rate is currently 6.2%. During the year, the return on the market portfolio was 9.0% and its standard devia
> One year ago, Super Star Closed-End Fund had an NAV of $10.40 and was selling at an 18% discount. Today, its NAV is $11.69 and it is priced at a 4% premium. During the year, Super Star paid dividends of $0.40 and had a capital gains distribution of $0.95
> Listed below is the 10-year, per-share performance record of Larry, Moe, & Curley’s Growth Fund, as obtained from the fund’s May 30, 2016, prospectus. Use this information to find LM&C’s hol
> You’ve uncovered the following per-share information about a certain mutual fund: On the basis of this information, find the fund’s holding period return for 2014, 2015, and 2016. (In all three cases, assume you buy
> Sara Thomas is a child psychologist who has built a thriving practice in her hometown of Boise, Idaho. Over the past several years she has been able to accumulate a substantial sum of money. She has worked long and hard to be successful, but she never im
> What protection does the Securities Investor Protection Corporation (SIPC) provide for securities investors? How are mediation and arbitration procedures used to settle disputes between investors and their brokers?
> The All-State Mutual Fund has the following five-year record of performance: Find this no-load fund’s five-year (2012–2016) average annual compound rate of return. Also find its three-year (2014–201
> A year ago, the Really Big Growth Fund was being quoted at an NAV of $21.50 and an offer price of $23.35. Today, it’s being quoted at $23.04 (NAV) and $25.04 (offer). What is the holding period return on this load fund, given that it was purchased a year
> Explain why it is difficult, if not impossible, to consistently outperform an efficient market. a. Does this mean that high rates of return are not available in the stock market? b. How can an investor earn a high rate of return in an efficient market?
> A year ago, an investor bought 200 shares of a mutual fund at $8.50 per share. Over the past year, the fund has paid dividends of $0.90 per share and had a capital gains distribution of $0.75 per share. a. Find the investor’s holding period return, given
> A $1,000 par value bond has a current price of $800 and a maturity value of $1,000 and matures in five years. If interest is paid semiannually and the bond is priced to yield 8%, what is the bond’s annual coupon rate?
> Using semiannual compounding, find the prices of the following bonds. a. A 10.5%, 15-year bond priced to yield 8% b. A 7%, 10-year bond priced to yield 8% c. A 12%, 20-year bond priced at 10% Repeat the problem using annual compounding. Then comment on t
> Elliot Karlin is a 35-year-old bank executive who has just inherited a large sum of money. Having spent several years in the bank’s investments department, he’s well aware of the concept of duration and decides to apply it to his bond portfolio. In parti
> Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 9%, but she expects them to fall to 7% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coup
> Which one of the following bonds would you select if you thought market interest rates were going to fall by 50 basis points over the next six months? a. A bond with a Macaulay duration of 8.46 years that’s currently being priced to yield 7.5% b. A bond
> Describe call and put options. Are they issued like other corporate securities?
> Find the Macaulay duration and the modified duration of a 20-year, 10% corporate bond priced to yield 8%. According to the modified duration of this bond, how much of a price change would this bond incur if market yields rose to 9%? Using annual compound
> A bond has a Macaulay duration of 8.62 and is priced to yield 8%. If interest rates go up so that the yield goes to 8.5%, what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to 7.5%, what will be the bond
> In what two ways, based on the number of shares transacted, do brokers typically charge for executing transactions? How are online transaction fees structured relative to the degree of broker involvement?
> Using annual compounding, find the yield to maturity for each of the following bonds. a. A 9.5%, 20-year bond priced at $957.43 b. A 16%, 15-year bond priced at $1,684.76 c. A 5.5%, 18-year bond priced at $510.65 Now assume that each of the above bonds i
> What is a stock chart? What kind of information can be put on charts, and what is the purpose of charting?
> What are two or three of the major investment attributes of common stocks?
> A 25-year, zero-coupon bond was recently being quoted at 11.625% of par. Find the current yield and the promised yield of this issue, given that the bond has a par value of $1,000. Using semiannual compounding, determine how much an investor would have t
> Two bonds have par values of $1,000. One is a 5%, 15-year bond priced to yield 8%. The other is a 7.5%, 20-year bond priced to yield 6%. Which of these has the lower price? (Assume annual compounding in both cases.)
> Assume that an investor is looking at two bonds: Bond A is a 20-year, 9% (semiannual pay) bond that is priced to yield 10.5%. Bond B is a 20-year, 8% (annual pay) bond that is priced to yield 7.5%. Both bonds carry 5-year call deferments and call prices
> A 10%, 25-year bond has a par value of $1,000 and a call price of $1,075. (The bond’s first call date is in five years.) Coupon payments are made semiannually (so use semiannual compounding where appropriate). a. Find the current yield, YTM, and YTC on t
> What are indicators of bond market behavior, and how are they different from stock market indicators? Name three sources of bond yield data.
> Compute the current yield of a 10%, 25-year bond that is currently priced in the market at $1,200. Use annual compounding to find the promised yield on this bond. Repeat the promised yield calculation, but this time use semiannual compounding to find yie
> An investor is considering the purchase of an 8%, 18-year corporate bond that’s being priced to yield 10%. She thinks that in a year, this bond will be priced in the market to yield 9%. Using annual compounding, find the price of the bond today and in on
> What is the current yield for a $1,000 par value bond that pays interest semiannually, has nine years to maturity, and is currently selling for $937 with a bond equivalent yield of 12%?
> Assume that you pay $850 for a long-term bond that carries a 7½% coupon. Over the course of the next 12 months, interest rates drop sharply. As a result, you sell the bond at a price of $962.50. a. Find the current yield that existed on this bond at the
> Which of the following bonds offers the highest current yield? a. A 9½%, 20-year bond quoted at 97¾ b. A 16%, 15-year bond quoted at 164⅝ c. A 5¼%, 18-year bond quoted at 54
> What is day trading, and why is it risky? How can you avoid problems as an online trader?
> Briefly describe each of the following and note how it is computed and how it is used by technicians: a. Advance-decline lines b. Arms index c. On-balance volume d. Relative strength index e. Moving averages
> Sara Nixon is looking for a fixed-income investment. She is considering two bond issues: a. A Treasury with a yield of 5% b. An in-state municipal bond with a yield of 4% Sara is in the 33% federal tax bracket and the 8% state tax bracket. Which bond wou
> Maria Lopez is a wealthy investor who’s looking for a tax shelter. Maria is in the maximum (35%) federal tax bracket and lives in a state with a very high state income tax. (She pays the maximum of 11½% in state income tax.) Maria is currently looking at
> An investor lives in a state with a 3% income tax rate. Her federal income tax bracket is 35%. She wants to invest in one of two bonds that are similar in terms of risk (and both bonds currently sell at par value). The first bond is fully taxable and off
> Which indexes can you use to compare your investment performance to general market returns? Briefly explain each of these indexes.
> An investor is in the 28% tax bracket and lives in a state with no income tax. He is trying to decide which of two bonds to purchase. One is a 7.5% corporate bond that is selling at par. The other is a municipal bond with a 5.25% coupon that is also sell
> Find the conversion value of a convertible preferred stock that carries a conversion ratio of 1.8, given that the market price of the underlying common stock is $40 a share. Would there be any conversion premium if the convertible preferred were selling
> Assume you just paid $1,200 for a convertible bond that carries a 7½% coupon and has 15 years to maturity. The bond can be converted into 24 shares of stock, which are now trading at $50 a share. Find the bond investment value of this issue, given that c
> An 8% convertible bond carries a par value of $1,000 and a conversion ratio of 20. Assume that an investor has $5,000 to invest and that the convertible sells at a price of $1,000 (which includes a 25% conversion premium). How much total income (coupon p
> A certain 6% annual coupon rate convertible bond (maturing in 20 years) is convertible at the holder’s option into 20 shares of common stock. The bond is currently trading at $800. The stock (which pays 75¢ a share in annual dividends) is currently price
> You are considering investing $800 in Higgs B. Technology Inc. You can buy common stock at $25 per share; this stock pays no dividends. You can also buy a convertible bond ($1,000 par value) that is currently trading at $790 and has a conversion ratio of
> A certain convertible bond has a conversion ratio of 21 and a conversion premium of 20%. The current market price of the underlying common stock is $40. What is the bond’s conversion equivalent?
> What is the random walk hypothesis, and how does it apply to stocks? What is an efficient market? How can a market be efficient if its prices behave in a random fashion?
> Differentiate between the services and costs associated with full-service, premium discount, and basic discount brokers. Be sure to discuss online transactions.
> Red Electrica España SA (E.REE) is refinancing its bank loans by issuing Eurobonds to investors. You are considering buying $10,000 of these bonds, which will yield 6%. You are also looking at a U.S. bond with similar risk that will yield 5%. You expect
> What role does current market information play in analyzing investment returns? How do changes in economic and market activity affect investment returns? Explain.
> Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she’s looking at a Swiss government bond that matures in 15 years and carries a 9½% coupon. The bond
> In early January 2010, you purchased $30,000 worth of some high-grade corporate bonds. The bonds carried a coupon of 8â…›% and mature in 2024. You paid a price of 94.125 when you bought the bonds. Over the five years from 2010 through 201
> You are presented with the following data: Calculate the MFCR for each week. Based on the result, are you bullish or bearish? Mutual Fund Cash Mutual Fund Total Week Position Assets Most recent $281,478,000 $2,345,650,000 2 $258,500,000 $2,350,000,
> You are given the following information for the number of stocks making new highs and new lows for each day: a. Calculate the 10-day moving-average NH-NL indicator. b. If there are 120 new highs and 20 new lows today, what is the new 10-day moving aver
