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?
> 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.
> 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?
> 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?
> 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
> 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?
> 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
