What are the four stages of an industry’s growth cycle? Which of these stages offers the biggest payoff to investors? Which stage is most influenced by forces in the economy?
> Identify and briefly describe the five types of risk to which bonds are exposed. What is the most important source of risk for bonds in general? Explain.
> How would you describe the behavior of market interest rates and bond returns over the past 50 years? Do swings in market interest rates have any bearing on bond returns? Explain.
> What is the difference between conversion parity and conversion value? How would you describe the payback period on a convertible? What is the investment value of a convertible, and what does it reveal?
> Explain why it is necessary to examine both the bond and stock properties of a convertible debenture when determining its investment appeal.
> Identify the equity kicker of a convertible security, and explain how it affects the value and price behavior of convertibles.
> What is a convertible debenture? How does a convertible bond differ from a convertible preferred?
> You invest $5,115 in stock and receive dividends of $50, $55, $60, and $65 over the following four years. At the end of the four years, you sell the stock for $5,300. What was the IRR on this investment?
> What’s the difference between dollar-denominated and non-dollar-denominated (foreign-pay) bonds? Briefly describe the two major types of U.S.-pay bonds. Can currency exchange rates affect the total return of U.S.-pay bonds? Of foreign-pay bonds? Explain.
> Describe an asset-backed security (ABS), and identify some forms of collateral used with these issues. Briefly note how an ABS differs from an MBS. What is the central idea behind securitization?
> What are the special tax features of (a) Treasury securities, (b) agency issues, and (c) municipal bonds?
> Briefly define each of the following and note how they might be used by fixed-income investors: (a) zero-coupon bonds, (b) CMOs, (c) junk bonds, and (d) Yankee bonds.
> Briefly describe each of the following types of bonds: (a) Treasury bonds, (b) agency issues, (c) municipal securities, and (d) corporate bonds. Note some of the major advantages and disadvantages of each.
> What appeal do bonds hold for investors? Give several reasons why bonds make attractive investment outlets.
> Briefly describe each of the following, and explain how it is used in technical analysis: a. Breadth of the market b. Short interest c. Odd-lot trading
> Describe the confidence index, and note the feature that makes it unique.
> Can the broad market have an effect on the price of individual stocks? Explain.
> 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.
> Assume you invest $$3,500 today in an investment that promises to return $7,700 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 inve
> 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
> How can behavioral finance have any bearing on investor returns? Do supporters of behavioral finance believe in efficient markets? Explain.
> 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
> 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?
> What is a stock chart? What kind of information can be put on charts, and what is the purpose of charting?
> Describe each of the following, and note how it is computed and used by technicians: a. Advance-decline lines b. Arms index c. On-balance volume d. Relative strength index e. Moving averages
> 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?
> Briefly describe the P/E approach to stock valuation, and note how this approach differs from the variable-growth DVM. Describe the P/CF approach and note how it is used in the stock valuation process. Compare the P/CF approach to the P/E approach, notin
> How would you go about finding the expected return on a stock? Note how such information would be used in the stock selection process.
> What is the difference between the variable-growth dividend valuation model and the free cash flow to equity approach to stock valuation? Which procedure would work better if you were trying to value a growth stock that pays little or no dividends? Expla
> You are considering purchasing a bond that pays annual interest of $50 per $1,000 of par value. The bond matures in one year, and at that time you will collect the par value and the interest payment. If you can purchase this bond for $1,010, what is the
> Briefly describe the dividend valuation model and the three versions of this model. Explain how CAPM fits into the DVM.
> How can valuation help you tell whether a security is a worthwhile investment? What role does the required return play in this process? Would you invest in a stock if it offered a rate of return that just equaled your required return?
> 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.
> How can a company’s growth prospects affect its P/E multiple? How about the amount of debt a firm uses? Are there other factors that affect a firm’s P/E ratio?
> Are the firm’s expected future earnings important in determining a stock’s investment merits? Discuss how stock valuation relies on these and other future estimates.
> 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?
> What is the purpose of stock valuation? What role does intrinsic value play in the stock valuation process?
> What is industry analysis, and why is it important?
> What effect, if any, does inflation have on common stocks?
> Briefly describe each of the following: a. Gross domestic product b. Leading indicators c. Money supply d. Producer prices
> 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
> Why is the business cycle so important to economic analysis? Does the business cycle have any bearing on the stock market?
> Describe the general concept of economic analysis. Is this type of analysis necessary, and can it really help the individual investor make a decision about a stock? Explain.
> Would there be any need for security analysis if we operated in an efficient market environment? Explain.
> How would you describe a satisfactory investment? How does security analysis help in identifying investment candidates?
> What is intrinsic value? How does it fit into the security analysis process?
> Contrast historical standards of performance with industry standards. Briefly note the role of each in analyzing the financial condition and operating results of a company.
> What is ratio analysis? Describe the contribution of ratio analysis to the study of a company’s financial condition and operating results.
> Why do investors bother to look at the historical performance of a company when future behavior is what really counts? Explain.
> What is fundamental analysis? Does the performance of a company have any bearing on the value of its stock? Explain.
> Calculate a one-year holding period return for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain.
> Briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. Note how economic issues fit into industry analysis.
> Identify the three major parts of security analysis, and explain why security analysis is important to the stock selection process.
> What is an odd-lot differential? How can you avoid odd-lot differentials? Which of the following transactions would involve an odd-lot differential? a. Buy 90 shares of stock b. Sell 200 shares of stock c. Sell 125 shares of stock
> 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
> What is a stock spin-off? In very general terms, explain how a stock spin-off works.
> What is a stock split? How does a stock split affect the market value of a share of stock? Do you think it would make any difference (in price behavior) if the company also changed the dividend rate on the stock? Explain.
> What are some of the advantages and disadvantages of owning common stock? What are the major risks to which stockholders are exposed?
> Describe the role that dividends and capital gains play in delivering returns to common stock investors.
> How would you characterize the historical performance of stocks?
> What are two or three of the major investment attributes of common stocks?
> An investor purchased a stock one year ago for $42. It paid an annual cash dividend of $2.50, and now it is worth $51.75. What total return did the investor earn? Would the investor have experienced a capital gain? Explain.
> 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.
> With all the securities available in the United States, why would a U.S. investor want to buy foreign stocks? Describe the two ways in which a U.S. investor can buy stocks in a foreign company. As a U.S. investor, which approach would you prefer? Explain
> What is the difference between a cash dividend and a stock dividend? Which would be more valuable to you? How does a stock dividend compare with a stock split? Is a 200% stock dividend the same as a two-for-one stock split? Explain.
> Why do most income stocks offer only limited capital gains potential? Does this mean the outlook for continued profitability is also limited? Explain.
> Define and briefly discuss the investment merits of each of the following. a. Blue chips b. Income stocks c. Mid-cap stocks d. American depositary receipts e. IPOs f. Tech stocks
> What are dividend reinvestment plans, and what benefits do they offer to investors? Are there any disadvantages?
> Why is the ex-dividend date important to stockholders? If a stock is sold on the ex–dividend date, who receives the dividend—the buyer or the seller? Explain.
> Briefly explain how the dividend decision is made. What factors are important in deciding whether, and in what amount, to pay dividends?
> What is a common stock? What is meant by the statement that holders of common stock are the residual owners of the firm?
> What range of values does beta typically exhibit? Are positive or negative betas more common? Explain.
> You have been researching a stock that you like, which is currently trading at $39 per share. You would like to buy the stock if it were a little less expensive—say, $36 per share. You believe that the stock price will go to $59 by year-end and then leve
> Explain what is meant by beta. What risk does beta measure? What is the market return? How is the interpretation of beta related to the market return?
> Briefly define and give examples of each of the following components of total risk. Which type of risk matters, and why? a. Diversifiable (or firm-specific) risk b. Undiversifiable (or systematic) risk
> What benefit, if any, does international diversification offer the individual investor? Compare and contrast the methods of achieving international diversification by investing abroad versus investing domestically
> Discuss how correlation affects the risk and return of a portfolio of two securities. Does correlation affect the maximum or minimum return that a portfolio of two assets can achieve? How are the maximum and minimum standard deviations of a two-asset por
> What is diversification? How does the risk of a diversified portfolio compare with the risks of the individual assets it contains?
> What is correlation, and why is it important? Describe the characteristics of returns that are (a) positively correlated, (b) negatively correlated, and (c) uncorrelated. Differentiate between perfect positive correlation and perfect negative correlation
> How do you calculate the return and standard deviation of a portfolio? Compare the calculation of a portfolio’s standard deviation with that for a single asset.
> Explain how you can reconcile the traditional and modern portfolio approaches.
> Define beta. How can you find the beta of a portfolio when you know the beta for each of the assets included within it?
> Define and differentiate among the diversifiable, undiversifiable, and total risk of a portfolio. Which risk is relevant in predicting the return that a portfolio may earn? How is it measured?
> 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?
> What is the efficient frontier? How is it related to the attainable set of all possible portfolios? How can it be used with an investor’s utility function to find the optimal portfolio?
> What is modern portfolio theory (MPT)? What is the feasible or attainable set of all possible portfolios? How is it derived for a given group of investments?
> Describe traditional portfolio management. Give three reasons why traditional portfolio managers like to invest in well-established companies.
> Is the CAPM a predictive model? How can investors use the CAPM?
> What is the capital asset pricing model (CAPM)? What role does beta play in the model? What is the risk premium? How is the security market line (SML) related to the CAPM?
> What is an efficient portfolio, and what role should such a portfolio play in investing?
> Define and briefly discuss each of the following sources of risk. a. Business risk b. Financial risk c. Purchasing power risk d. Interest rate risk e. Liquidity risk f. Tax risk g. Event risk h. Market risk
> Define risk. Explain what we mean by the risk-return tradeoff. What happens to the required return as risk increases? Explain.
> Explain how either the present value (of benefits versus cost) or the IRR measure can be used to find a satisfactory investment. Given the following data, indicate which, if any, of these investments is acceptable. Explain your findings.
> Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?
> If you place a stop-loss order to sell at $52 on a stock currently selling for $55.50 per share, what is likely to be the minimum loss you will experience on 100 shares if the stock price rapidly declines to $49.50 per share? Explain. What if you had pla
> What is meant by the holding period, and why is it advisable to use holding periods of equal length when comparing alternative investments? Define holding period return, and explain for what length holding periods it is typically used.
> Define the following terms and explain how they are used to find the risk-free rate of return and the required rate of return for a given investment. a. Real rate of return b. Expected inflation premium c. Risk premium for a given investment
> What is a satisfactory investment? When the present value of benefits exceeds the cost of an investment, what can you conclude about the rate of return earned by the investor relative to the discount rate?
> What role do historical performance data play in estimating an investment’s expected return? Discuss the key factors affecting investment returns—internal characteristics and external forces.
> Describe the steps involved in the investment decision process. Be sure to mention how returns and risks can be evaluated together to determine acceptable investments.
> Differentiate among the three basic risk preferences: risk-indifferent, risk-averse, and risk-seeking. Which of these attitudes toward risk best describes most investors?
