What popular financial business periodicals would you use to follow the financial news? General news? Business news? Would you prefer to get your news from print sources or online, and why?
> 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?
> Briefly describe standard deviation as a measure of risk or variability.
> Explain what is meant by the return on an investment. Differentiate between the two components of return—income and capital gains (or losses).
> Describe the basic philosophy and use of stock market averages and indexes. Explain how the behavior of an average or index can be used to classify general market conditions as bull or bear.
> Briefly describe several types of information that are especially well suited to publication on the Internet. What are the differences between the online and print versions, and when would you use each?
> Imagine that you have placed a limit order to buy 100 shares of Herr Mining Co. at a price of $68, although the stock is currently selling for $71. Discuss the consequences, if any, of each of the following situations. a. The stock price drops to $69 per
> The current exchange rate between the U.S. dollar and the Japanese yen is 109 (¥/$). That is, 1 dollar can buy 109 yen. How many dollars would you get for 1,000 Japanese yen?
> How would you access each of the following types of information, and how would the content help you make investment decisions? a. Prospectuses b. Back-office research reports c. Investment letters d. Price quotations
> Briefly describe the types of information that the following resources provide. a. Stockholders’ report b. Comparative data sources c. Standard & Poor’s Corporation d. Mergent e. Value Line Investment Survey
> Differentiate between descriptive information and analytical information. How might one logically assess whether the acquisition of investment information or advice is economically justified?
> What are the pros and cons of using the Internet to choose and manage your investments?
> What benefits does an investment club offer the small investor? Would you prefer to join a regular or an online club, and why?
> Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.
> Identify the four main types of online investment tools. How can they help you become a better investor?
> 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?
> 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?
> Emma Radcliffe places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $43 per share. Ignoring brokerage commissions, determine how much money Radcliffe will probably have to pay. If
> What is day trading, and why is it risky? How can you avoid problems as an online trader?
> Differentiate between the services and costs associated with full-service, premium discount, and basic discount brokers. Be sure to discuss online transactions.
> Differentiate among market orders, limit orders, and stop-loss orders. What is the rationale for using a stop-loss order rather than a limit order?
> Briefly differentiate among the following types of brokerage accounts: a. Single or joint b. Custodial c. Cash d. Margin e. Wrap
> Describe the types of services offered by brokerage firms, and discuss the criteria for selecting a suitable stockbroker.
> Go to Yahoo! Finance, and look up data on the Vanguard 500 Index Investor fund (ticker symbol VFINX) and the Fidelity Magellan Fund (ticker symbol FMAGX). These are among the largest mutual funds in the United States. Pick one of these funds and click th
> The chart shows the number of global corporate bond issues for which Standard & Poor’s issued ratings upgrades or downgrades every year from 1981 to 2017. a. What is the trend in the number of ratings changes (both upgrades and down
> At the beginning of this chapter, you read about a 2018 earnings announcement from Red Hat in which earnings per share were reported as $0.72 for the quarter. Let’s make a simple assumption and say that earnings for the year were four times as much, or $
> At the beginning of the chapter you read about a couple of analyst reports on Brinker International. Use an online source such as Yahoo! Finance or Brinker’s own website to look up the company’s income statement for the fiscal year ending in June 2018. W
> In this problem we will visit Commercial Vehicle Group (CVGI), which was introduced at the beginning of the chapter. The following table shows the monthly return on CVGI stock and on the S&P 500 stock index from January 2012 to December 2017. Questio
> When a company conducts a stock split, it exchanges new shares for old ones according to some ratio. For example, in March 2018, Herbalife conducted a two-for-one stock split, so after the split each shareholder received two new shares in exchange for ea
> The table below shows the annual return generated by Netflix common stock. Calculate the average annual return and its standard deviation. Compare this to the average return and standard deviation for Target Corporation and American Eagle Outfitters, Inc
> The regular dividend on PG&E preferred stock is $0.3125 per quarter, or $1.25 per year. In December 2017, just before the company suspended dividend payments, the preferred shares were trading at $26.33. What was the dividend yield at that time?
> In the beginning of this chapter you read about open interest on Amazon put options. Suppose in January 2018, put and call options were available on Amazon stock with the following terms: Option Strike Price/Premium Expiration Put $1,200 $195 August 2018
> Dr. Marilyn Davis, a single, 34-year-old heart specialist, is considering the purchase of a small office condo. She wants to add some diversity to her investment portfolio, which now contains only corporate bonds and preferred stocks. In addition, becaus
> Gary Sofer wants to estimate the market value of the Wabash Oaks Apartments, a 12-unit building with six one-bedroom units and six two-bedroom units. The present owner of Wabash Oaks provided Gary with the following annual income statement. Todayâ&
> Hal and Terri Wilson had most of their funds invested in common stock in late 2019. The Wilsons didn’t really do very much investment planning, and they had practically no background or understanding of how income taxes might affect the
> Kathleen “Penni” Kennedy is a young career woman who has built a substantial investment portfolio. Most of her holdings are preferred stocks—a situation she does not want to change. Penni is now considering the purchase of $4,800 worth of LaRamie Corpora
> Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a two-income family. Jim and Polly are both college graduates and hold high paying jobs. Jim has been an avid investor in the stock market for a number
> T. J. Patrick is a young, successful industrial designer in Portland, Oregon, who enjoys the excitement of commodities speculation. T. J. has been dabbling in commodities since he was a teenager—he was introduced to this market by his dad, who is a grain
> A little more than 10 months ago, Luke Weaver, a mortgage banker in Phoenix, bought 300 shares of stock at $40 per share. Since then, the price of the stock has risen to $75 per share. It is now near the end of the year, and the market is starting to wea
> Imagine that you want to create your own stock index to measure the performance of the stock market over time. You decide to use a methodology similar to that used to calculate the DJIA (see Equation 3.1). Your index will contain 10 stocks carefully sele
> Hector Francisco is a successful businessman in Atlanta. The box-manufacturing firm he and his wife, Judy, founded several years ago has prospered. Because he is self-employed, Hector is building his own retirement fund. So far, he has accumulated a subs
> Charles Spurge, a mathematician with Ansco Petroleum Company, wishes to develop a rational basis for timing his portfolio transactions. He currently holds a security portfolio with a market value of nearly $100,000, divided equally between a very conserv
> Mary and Nick Stalcheck have an investment portfolio containing four investments. It was developed to provide them with a balance between current income and capital appreciation. Rather than acquire mutual fund shares or diversify within a given class of
> Calvin Jacobs is a widower who recently retired after a long career with a major Midwestern manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of shop supervisor over 30 years with the firm. Calvin receives Social Security
> The Reverend Mark Thomas is a minister in San Diego. He is married, has one young child, and earns a modest income. Because religious organizations are not notorious for their generous retirement programs, the reverend has decided he should do some inves
> Grace Hesketh is the owner of an extremely successful dress boutique in downtown Chicago. Although high fashion is Grace’s first love, she’s also interested in investments, particularly bonds and other fixed-income securities. She actively manages her ow
> Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They ad
> It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating results of the company issuing the bond. Just as fina
> Max and Veronica Shuman, along with their teenage sons Terry and Thomas, live in Portland, Oregon. Max is a sales rep for a major medical firm, and Veronica is a personnel officer at a local bank. Together they earn an annual income of about $100,000. Ma
> Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in invest
> Imagine that the Mini-Dow Average (MDA) is calculated by adding up the closing prices of five stocks and dividing that sum by a divisor. The divisor used in the calculation of the MDA is currently 0.775. The closing prices for each of the five stocks in
> Brett Daly is an active stock trader and an avid market technician. He got into technical analysis about 10 years ago, and although he now uses the Internet for much of his analytical work, he still enjoys running some of the numbers and doing some of th
> Marc Dodier is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been following one of the hottest issues on Wall Street, C&I Medical Supplies, a company that has turned
> Chris Norton is a young Hollywood writer who is well on his way to television superstardom. After writing several successful television specials, he was recently named the head writer for one of TV’s top-rated sitcoms. Chris fully reali
> Anna Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and operates a highly successful modeling agency. Anna manages her modest but rapidly growing investment portfolio, made up mostly of high-grade common stocks. Because she’s
> Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack
> Wally Wilson is a commercial artist who makes a good living by doing freelance work—mostly layouts and illustrations—for local ad agencies and major institutional clients (such as large department stores). Wally has be
> 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
> Susan Lussier is 35 years old and employed as a tax accountant for a major oil and gas exploration company. She earns nearly $135,000 a year from her salary and from participation in the company’s drilling activities. An expert on oil a
> Walt Davies and Shane O’Brien are district managers for Lee, Inc. Over time, as they moved through the firm’s sales organization, they became close friends. Walt, who is 33 years old, currently lives in Princeton, New Jersey. Shane, who is 35, lives in H
> Over the past 10 years, Molly O’Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total market value of $82,500. Molly is at present considering
