Question: What is a mutual fund? Discuss the

> Assume that an investment generates the following income stream and can be purchased at the beginning of 2020 for $2,000 and sold at the end of 2026 for $2,200. Estimate the IRR for this investment. If a minimum return of 5% is required, would you recomm

> Why would an investor want to use index options to hedge a portfolio of common stock? Could the same objective be obtained using options on ETFs? If the investor thinks the market is in for a fall, why not just sell the stock?

> Identify and briefly discuss two ways to use stock-index options. Do the same for foreign currency options.

> Briefly describe the differences and similarities between stock-index options and stock options. Do the same for foreign currency options and stock options.

> 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.

> Describe three ways in which investors can use stock options.

> Describe call and put options. Are they issued like other corporate securities?

> What are indicators of bond market behavior, and how are they different from stock market indicators? Name three sources of bond yield data.

> Which indexes can you use to compare your investment performance with general market returns? Briefly explain each of these indexes.

> What role does current market information play in analyzing investment returns? How do changes in economic and market activity affect investment returns? Explain.

> Why is it important to continuously manage and control your portfolio?

> An investor buys a bond for $10,000. The bond pays $200 interest every six months. After 18 months, the investor sells the bond for $9,500. Describe the types of income and/or loss the investor had.

> What role could an asset allocation fund play? What makes an asset allocation scheme effective?

> Briefly describe the basic approaches to asset allocation: (a) fixed weightings, (b) flexible weightings, and (c) tactical asset allocation.

> What is asset allocation? How does it differ from diversification? What role does asset allocation play in constructing an investment portfolio?

> Describe the two items an investor should consider before reaching a decision to sell an investment.

> Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.

> Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?

> Briefly describe each of the following plans and differentiate among them. a. Dollar-cost averaging b. Constant-dollar plan c. Constant-ratio plan d. Variable-ratio plan

> Explain the role that formula plans can play in the timing of security transactions. Describe the logic underlying the use of these plans.

> What role do an investor’s portfolio objectives play in constructing a portfolio?

> Explain the role of portfolio revision in the process of managing a portfolio.

> Justin Lieberman must earn a minimum rate of return of 9.25% as compensation for the risk of the following investment. a. Use present value techniques to estimate the IRR on this investment. b. On the basis of your finding in part a, should Justin make t

> Why is Jensen’s measure (Jensen’s alpha) generally preferred over the measures of Sharpe and Treynor for assessing portfolio performance? Explain.

> Briefly describe each of the following measures for assessing portfolio performance and explain how they are used. a. Sharpe’s measure b. Treynor’s measure c. Jensen’s measure (Jensen’s alpha)

> Why is comparing a portfolio’s return to the return on a market index inadequate?

> Describe the steps involved in measuring portfolio return. Explain the role of the portfolio’s HPR in this process, and explain why one must differentiate between realized and unrealized gains.

> What is active portfolio management? Will it result in superior returns? Explain.

> What is a problem investment? What questions should one consider when analyzing each investment in a portfolio?

> Under what three conditions would an investment holding be a candidate for sale? What must be true about the expected return on a risky investment, when compared with the return on a low-risk investment, to cause a rational investor to acquire the risky

> Distinguish between the types of dividend distributions that mutual funds make. Are these dividends the only source of return for a mutual fund investor? Explain.

> Briefly discuss holding period return (HPR) and yield as measures of investment return. Are they equivalent? Explain.

> What role do an investor’s personal characteristics play in determining portfolio policy?

> Use a financial calculator or an Excel spreadsheet to estimate the IRR for each of the following investments.

> If growth, income, and capital preservation are the primary objectives of mutual funds, why do we bother to categorize funds by type? Do you think such classifications are helpful in the fund selection process? Explain.

> What is an asset allocation fund, and how does it differ from other types of mutual funds? How does a target date fund work?

> Briefly describe each of the following types of mutual funds: a. Aggressive-growth funds b. Equity-income funds c. Growth-and-income funds d. Bond funds e. Sector funds f. Socially responsible funds

> What is the difference between a load fund and a no-load fund? What are the advantages of each type? What is a 12(b)-1 fund? Can such a fund operate as a no-load fund?

> Describe a back-end load, a low load, and a hidden load. How can you tell what kinds of fees and charges a fund has?

> Define each of the following: a. Open-end investment companies b. Closed-end investment companies c. Exchange-traded funds d. Real estate investment trusts e. Hedge funds

> Briefly describe how a mutual fund is organized. Who are the key players in a typical mutual fund organization?

> What are the advantages and disadvantages of mutual fund ownership?

> Discuss the types of risk that mutual fund shareholders face. What is the major risk exposure of mutual funds? Are all funds subject to equal risk? Explain.

> Identify three potential sources of return to mutual fund investors, and briefly discuss how each could affect total return to shareholders. Explain how the discount or premium of a closed-end fund can also be treated as a return to investors.

> Kate Berry will not invest unless she can earn at least an 8% return. She is evaluating an investment opportunity that requires an initial outlay of $2,500 and promises to return $5,000 in eight years. a. Use present value techniques to estimate the IRR

> What is the dominant type of closed-end fund? How do CEFs differ from open-end funds?

> How important is the behavior of the market in affecting the price performance of mutual funds? Explain. Does the future behavior of the market matter in the selection process? Explain.

> Briefly describe some of the investor services provided by mutual funds. What are automatic reinvestment plans, and how do they differ from automatic investment plans?

> What are fund families? What advantages do fund families offer investors? Are there any disadvantages?

> Briefly describe the term bond equivalent yield. Is there any difference between promised yield and bond equivalent yield? Explain.

> What’s the difference between current yield and yield to maturity? Between promised yield and realized yield? How does YTC differ from YTM?

> Why are bonds generally priced using semiannual compounding? Does it make much difference if you use annual compounding?

> Explain how market yield affects the price of a bond. Could you price a bond without knowing its market yield? Explain.

> How might you, as a bond investor, use information about the term structure of interest rates and yield curves when making investment decisions?

> You are evaluating five different investments, all of which involve an upfront outlay of cash. Each investment will provide a single cash payment back to you in the future. Details of each investment appear below. Calculate the IRR of each investment. St

> What is the term structure of interest rates and how is it related to the yield curve? What information is required to plot a yield curve? Describe an upward-sloping yield curve and explain what it has to say about the behavior of interest rates. Do the

> Explain why interest rates are important to bond investors. What causes interest rates to move, and how can you monitor such movements?

> Why is interest sensitivity important to bond speculators? Does the need for interest sensitivity explain why active bond traders tend to use high-grade issues? Explain.

> What strategy would you expect an aggressive bond investor (someone who’s looking for capital gains) to employ?

> Briefly describe a bond ladder, and note how and why an investor would use this investment strategy. What is a tax swap, and why would it be used?

> Describe the process of bond portfolio immunization, and explain why an investor would want to immunize a portfolio. Would you consider portfolio immunization a passive investment strategy comparable to, say, a buy-and-hold approach? Explain.

> What does the term duration mean to bond investors, and how does the duration of a bond differ from its maturity? What is modified duration, and how is it used? What is effective duration, and how does it differ from modified duration?

> What is the difference between a premium bond and a discount bond? What three attributes are most important in determining an issue’s price volatility?

> Is there a single market rate of interest applicable to all segments of the bond market, or is there a series of market yields? Explain and note the investment implications of such a market environment.

> From the perspective of an individual investor, what good are bond ratings? Do bond ratings indicate the amount of market risk embedded in a bond? Explain.

> What are bond ratings, and how can they affect investor returns? What are split ratings?

> A local entrepreneur asks you to invest $10,000 in a business venture. Based on your estimates, you would receive nothing for three years, at the end of year four you would receive $4,900, and at the end of year five you would receive $14,500. If your es

> An investor recently sold some stock in a European company that was worth 20,000 euros. The US$/€ exchange rate is currently 1.200, meaning that 1 euro buys 1.2 dollars. How many U.S. dollars will the investor receive?

> Bonds are said to be quoted “as a percent of par.” What does that mean? What is one point worth in the bond market?

> What is the difference between a call feature and a sinking-fund provision? Describe the three types of call features. Can a bond be freely callable but nonrefundable?

> Can issue characteristics (such as coupon and call features) affect the yield and price behavior of bonds? Explain.

> 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