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If a firm’s borrowing rate exceeds its ROA, then ROE will ______. A. increase by an amount that depends on the equity/debt ratio. B. increase by an amount that depends on the debt/equity ratio. C. decline by an amount that […]

An investor may deposit $2,000 into a traditional or Roth IRA. After 30 years, given a 9% annual return and a 20% tax rate, how much more or less money will the investor have if all investments are liquidated after […]

The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is […]

Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, […]

A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 5% per year over the next 4 years. The portfolio is currently worth $10 million. One year later interest rates are at 6%. What […]

When choosing a benchmark, it is best to use _________. A. numerous firms in the same industry B. your number one competitor C. the aspirational firm you wish to emulate D. standards established by the FASB Employers commonly match at […]

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of […]

__________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the options ______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager’s […]

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) […]

Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions? A. default risk B. foreign exchange risk C. market risk D. political risk A ______ insurance […]

If an investor is a successful market timer, his distribution of monthly portfolio returns will __________. A. be skewed to the left B. be skewed to the right C. exhibit kurtosis D. exhibit neither skewness nor kurtosis An investor can […]

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. market risk B. nondiversifiable risk C. systematic risk D. unique risk On day 1, the stock price of Ford was $12 and the […]

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y […]

A covered call strategy benefits from what environment? A. Falling interest rates B. Price stability C. Price volatility D. Unexpected events What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A. 3.72% B. […]

Which one of the following is not a demand shock? A. increase in government spending B. increases in the money supply C. reductions in consumer spending D. improvements in education of U.S. workers Investing in two assets with a correlation […]

The Option Clearing Corporation is owned by _________. A. the exchanges on which stock options are traded B. the Federal Deposit Insurance Corporation C. the Federal Reserve System D. major U.S. banks When the market is more optimistic about a […]

The intrinsic value of a call option is equal to _______________. A. the stock price minus the exercise price B. the exercise price minus the stock price C. the stock price minus the exercise price plus any expected dividends D. […]

An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0 Mutual funds provide the following for their shareholders. A. diversification B. professional management C. record keeping and administration […]

The __________ is among the world’s largest derivatives exchanges and operates a fully electronic trading and clearing platform. A. CBOE B. CBOT C. CME D. Eurex The difference between balanced funds and asset allocation funds is that _____. A. balanced […]

The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta […]

Which type of fund generally has the lowest average expense ratio? A. actively managed bond funds B. hedge funds C. indexed funds D. actively managed international funds LIBOR is a key reference rate in the money markets. Many ______ of […]

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A. $4,500 B. $6,000 C. $9,000 D. $10,000 Yields on municipal bonds are typically ___________ yields on corporate […]

The most marketable money market security is _____. A. Treasury bills B. bankers’ acceptances C. certificates of deposit D. common stock An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life […]

Where y = yield to maturity, the duration of a perpetuity would be _________. A. y B. y/(1 + y) C. 1/y D. (1 + y)/y An investor’s degree of risk aversion will determine his or her ______. A. optimal […]

Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________. A. […]

Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst? A. investment management ethics B. securities analysis C. securities marketing techniques […]

TIPS are ______. A. Treasury bonds that pay no interest and are sold at a discount B. U.K. bonds that protect investors from default risk C. securities that trade on the Toronto stock index D. Treasury bonds that protect investors […]

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills Which of the […]

Which of the following funds are usually most tax-efficient? A. equity funds B. bond Funds C. ETFs D. specialized-sector funds The term investment horizon refers to __________. A. the proportion of short-term to long-term investments held in an investor’s portfolio […]

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen’s alpha of the portfolio if the […]

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor’s utility line D. security market line A typical […]

Research suggests that option-pricing models that allow for the possibility of ___________ provide more accurate pricing than does the basic Black-Scholes option-pricing model. I. early exercise II. changing expected returns of the stock III. time varying stock price volatility A. […]

The Black-Scholes hedge ratio for a long call option is equal to __________. A. N(d1) B. N(d2) C. N(d1) – 1 D. If you have an extremely “bullish” outlook on the stock market, you could attempt to maximize your rate […]

__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share […]

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following […]

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind The stock price of Atlantis Corp. is $43 today. The risk-free […]

The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A. U.S. goods will increase in cost, and Japan will import more. B. U.S. goods will […]

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital […]

A call option on Juniper Corp. stock with an exercise price of $75 and an expiration date 1 year from now is worth $3 today. A put option on Juniper Corp. stock with an exercise price of $75 and an […]

Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty. A. 59; 10% B. 62; 5% C. 65; 7 % D. 63; 5% Rank the interest sensitivity of the following from […]

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. II only B. II […]

Tilting your retirement savings plan toward your later years should only be done by investors _____________. A. who are sufficiently risk averse B. who are more tolerant of risk C. who are unsure if their income growth will keep up […]

An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm’s position within the industry is examined. This is called __________ analysis. A. […]

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance Which of the following transactions will result in a decrease in cash flow from operations? […]

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns […]

One extensive study found that about ______ of financial managers use CAPM to estimate cost of capital. A. one-third B. one-half C. three quarters D. ninety percent The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in […]

Which one of the following is largely based on forecasts of macroeconomic factors? A. security selection B. passive investing C. market efficiency D. market timing During a period when prices have been rising, the _________ will be _______ the current […]

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond’s price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower The […]

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost […]

Operating ROA is calculated as __________, while ROE is calculated as _________. A. EBIT/total assets; net profit/total assets B. net profit/total assets; EBIT/total assets C. EBIT/total assets; net profit/equity D. net profit/EBIT; sales/total assets $1,000 par value zero-coupon bonds (ignore […]

In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period. A. 33% B. 52% C. 65% D. 85% In a 2011 study, Agarwal, […]

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were […]

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________. A. when the long-term direction of the market is positive B. when the long-term direction of the market is negative C. […]

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03% Which of the following ETFs […]

The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities’ covariance B. the sum of the securities’ variance C. the weighted sum of the securities’ expected returns D. the weighted sum […]

Hedge ratios for long calls are always __________. A. between -1 and 0 B. between 0 and 1 C. 1 D. greater than 1 A security with normally distributed returns has an annual expected return of 18% and standard deviation […]

In the article “Danger: High Levels of Company Stock,” what is the maximum amount of your employer’s stock that the author recommends you hold in your retirement account? A. 5% B. 10% C. 50% D. 90% Recent analysis indicates that […]

Chapter 15 Excel Application: Spreads and Straddles 1. Use the data in this spreadsheet to plot out the profit on a bullish spread (see Figure 15.10) with X1 = 120 and X2 = 130. Answers can vary slightly. [Select Cells: […]

Chapter 11 Excel Application: Convexity 1. Calculate the convexity of a “bullet” fixed income portfolio, that is, a portfolio with a single cash flow. Suppose a single $1,000 cash flow is paid in year 5. [Change cells: 6 0; 8 […]

1. What were the betas of Ford, Toyota, and Honda? Step 1: Calculate the risk premium (excess return) for each firm for every month. [Change cells: 5 5 $ 5] [Select cells: G5:J5; In Home Tab select Fill – Right] […]

Chapter 3: Buying on Margin 1. Suppose you buy 100 shares of stock initially selling for $50, borrowing 25% of the necessary funds from your broker, i.e. the initial margin on your purchase is 25%. You pay an interest rate […]

Chapter 3: Short Sales 1. Suppose you sell short 100 shares share of stock initially selling for $100 a share. Your initial margin requirement is 50% of the value of the stock sold. You receive no interest on the funds […]

Chapter 15 Excel Application: Options, Stock, and Lending 1. Plot the rate of return to the call-plus-bills strategy (using a diagram like that in Figure 15.5), but now assuming the investor uses an in-the-money call option with a strike price […]

Chapter 17 Excel Application: Parity and Spreads 1. Experiment with different values for both income yield and interest rate. What happens to the size of the time spread (the difference in futures prices for the long versus short maturity contracts) […]

Chapter 18 Excel Application: Performance Attribution 1. What would happen to the contribution of asset allocation to overall performance if the actual weights had been 70/17/13 in the three markets rather than 75/12/13? [Change cells: 15 .7; 16 .17; 17 […]

Chapter 18 Excel Application: Performance Measures 1. Examine the performance measures of the funds included in the spreadsheet. a. Rank the funds by the five performance measures. Using the Excel sort function: i. [Sort by Column F] Sharpe Ratio: Millennium, […]

[Cell B12 = $B$3 + .02] Cell B14 automatically calculates the sales price after the rate increase. The sales price drops from $1,000 to $981.82 (an $18.18 decrease). Cell F13 automatically calculates the value of reinvested coupons after the rate […]

1. Find three points on the efficient frontier corresponding to three different expected returns. First select the correct tab, and scroll down to the Portfolio Efficient Frontier [Select Tab “International Port”] In the chart “Porfolio Efficient Frontier,” search for the […]

Chapter 01 – Investments: Background and Issues Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. CHAPTER ONE INVESTMENTS: BACKGROUND AND ISSUES INTRODUCTION TO THE INSTRUCTOR’S MANUAL Welcome to […]

Cash Computer equipment Bank loan Software cost # of Microsoft shares Microsoft price/share Solution a. Assets Liabilities & Equity Cash –$ Bank Loan –$ Computer equipment –$ Shareholder’s Equity –$ Total –$ –$ Lanni Products is a start-up computer software […]

provides a payoff that depends on the prices of a primary asset but not the claim on real assets. can be addressed through corporate governance mechanisms, such as the design of executive compensation, oversight by the Board, and monitoring from […]

features and insurance. Interest income on municipal bonds is not taxed at the federal level and often if an investor buys a bond issued by an entity in their home state the interest income is exempt from state taxes as […]

Bond life (years) Current yield Coupon rate New yield (1 yr later) Solution You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to […]

b. Eurobond: They are bonds issued in the currency of one country but sold in other national markets. c. Zero-coupon bond: Zero-coupon bonds are bonds that pay no coupons but do pay a par value at maturity. d. Samurai bond: […]

b. An intermarket spread swap should work. The trade would be to long the corporate bonds and short the treasuries. A relative gain will be realized when the rate spreads return to normal. 6. The increase will be larger than […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. bonds that are mispriced due to other factors. For example, finding a bond that has a credit-risk premium too large […]

Tuition Interest rate New rate ( c 1 ) New rate ( c 2 ) Solution Year Tuition PV (CF) % CF Yr x %(CF) 1 –$ $0.00 #DIV/0! #DIV/0! You will be paying $10,000 a year in tuition expenses […]

2. The yield curve, by definition, incorporates future interest rates. As such, it reflects future expectations and is a leading indicator. 4. It would be considered a supply shock which affects production capacity and costs. Companies would thus become more […]

of firms. When investing in foreign markets, analysts must consider the effect that changes in exchange rates will have on returns The extent to which exchange rates and other variables will impact a firm depend upon its particular product market, […]

Nominal inerest rate Inflation rate If the nominal interest rate is 5% and the inflation rate is 3%, then what is the real interest rate? Solution Real interest rate 0.00% ATech ZTech Fixed costs mil Fixed costs mil Profits mil […]

in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are […]

is thought to be a measure of market valuation over the book value, presumably due to future growth opportunities of the firm. Some believe that if the market to book is less than one it indicates an undervalued security that […]

Current annual dividend Div growth (yrs 1, 2) Div growth (terminal) Required ROR Solution D1 –$ D2 –$ Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at […]

ROE Debt/Equity ratio Tax rate Interest rate on debt Solution A firm has an ROE of 3%, a debt/equity ratio of .5, a tax rate of 35%, and pays an interest rate of 6% on its debt. What is its […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accounting earnings are earnings reported on the income statement that follow a set of generally accepted, but widely divergent, accounting […]

= Cost of Goods Sold Average Inventories = $2,850 ($490 + $480)/2 = 5.876 = Debt Equity = $3,340 $960 = 3.479 Chapter 14 – Financial Statement Analysis CHAPTER 14 FINANCIAL STATEMENT ANALYSIS 1. a. Inventory turnover ratio in 2015 […]

of the expiration month. Friday is the last day you can exercise. Contracts may be sold prior to maturity. This is an important point. You don’t have to exercise to realize the value of the option. In fact in most […]

will have the highest volume. A common phrase used by traders is “avoid the cheaps and the deeps.” Cheap options are those with very little time premium. Deep options are those that are way out of or in the money. […]

Strike Premium Call Put –$ Stock price You establish a straddle on Walmart using September call and put options with a strike price of $80. The call premium is $7.00 and the put premium is $8.50. a. What is the […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 16 – Option Valuation CHAPTER SIXTEEN OPTION VALUATION CHAPTER OVERVIEW This chapter discusses factors affecting the value of an […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 16 – Option Valuation CHAPTER 16 OPTION VALUATION 1. Intrinsic value = S0 – X = $55 – $50 […]

Strike $ Interest rate Time to X (% of yr) Call Option Price = Put Option Price = Solution A call option on Jupiter Motors stock with an exercise price of $75 and one-year expiration is selling at $3. A […]

Futures price Bond par value New futures price Margin requirement You purchase a Treasury-bond futures contract with an initial margin requirement of 15% and a futures price of $115,098. The contract is traded on a $100,000 underlying par value bond. […]

b. To benefit from the mispricing, we sell gold short $1,200 today, lend the money at risk-free rate, and long gold future of $1,141. One year from today we’ll have cash inflows from the loan of $1,224 and the proceeds […]

The futures price is the price that is agreed-upon for delivery at maturity. Long positions are contracts in which the owner agrees to purchase the asset at maturity but the purchase price is determined by the futures price at the […]

portfolio) will appear to have a zero alpha when evaluated using the multi-index model but not when using the single-index one. The nonzero alpha appears even in the absence of superior performance. Thus, the single-index alpha can be misleading. Copyright […]

T-bill rate Market return Portfolio beta Realized return Solution During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%. Evaluate the manager based […]

individual securities. Passive management, even if the portfolio is updated, is basically focused on the level of risk of the portfolio in conjunction with the stated portfolio goals. Active management is far more difficult. Risk levels are fairly stable but […]

British stock price Investment Exchange rate ($/L) Solution a. Share purchased #DIV/0! b. Price per share Pound return 1.80 2.00 2.20 Dollar return per FX rate ($/L) Suppose a U.S. investor wishes to invest in a British firm currently selling […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. concerning the efficacy of passive international diversification. The results indicate that the benefits of internationally diversifying are declining and are […]

international investment and the U.S. portfolio, a diversification gain cannot be assured. In fact, should a high standard deviation security with zero or one correlation with the U.S. portfolio be added, the overall standard deviation of the portfolio would increase. […]

ST municipal bond yield Taxable bond yield Solution After-Tax Yield = Rate on the Taxable Bond x (1 － Tax Rate) Tax bracket After tax yield on taxable bond Higher yield Suppose that short-term municipal bonds currently offer yields of […]

overall market nearly as well as the more than 5000 stocks contained in The Wilshire index. The DJIA is simply too small. 3. Money market securities are short-term, relatively low risk, and highly liquid. Also, their unit value almost never […]

instruments are sometimes called “cash” instruments or “cash equivalents,” because they earn little, and have little principal risk. After covering money markets, the chapter discusses the major capital market instruments. The capital market discussion is divided into three parts, long– […]

Equity portfolio size million Equity portfolio beta S&P Index value Solution A fund manages a $2.4 billion equity portfolio with a beta of .6. If the S&P contract multiplier is $250 and the index is currently at 1,600, how many […]

but they are open to high net worth individuals. Most require minimum investments of $250,000, some go up to $1,000,000. A few now have a minimum investment of $25,000, but these are still relatively new. The following table provides a […]

2. Number of contracts = 2,400,000,000/(250  1,600)  .6 = 3,600 contracts Since the value of the fund at the end of the first year is 92% of its base value, the fund must earn 13% during the second […]

process involves specifying investment objectives. A planner will normally help their clients’ budget and even suggest changes in lifestyle to help them meet their goals. Often the planner may have to tell the client that their goals aren’t realistic or […]

investors are unable to frequently review their portfolio and reallocate the investment assets. The target date fund does this automatically for the investor. Primary Insurance Amount (PIA). This determines the monthly annuity paid. Like insurance, once the worker works the […]

Risk tolerance: Proximity of payouts limits tolerance for risk taking. As a result, the portfolio’s asset mix should lean toward intermediate-maturity fixed- income assets of relatively high quality. Investment Constraints Liquidity: Proximity of payouts requires liquidity above that required for […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. a statement of investment policy. Additional decisions include whether to pursue an active or a buy and hold investment strategy. […]

spread, brokerage fees, commissions, and taxes (when applicable). These reduce the amount received by a seller and increase the cost incurred by a buyer. the secondary market is the market for trading existing securities. After firms sell their newly-issued stocks […]

Price per share Equity invested Borrowed funds Interest rate Total investment –$ Price change Margin required Solution a. Shares bought #DIV/0! Value change –$ You are bullish on Telecom stock. The current market price is $50 per share, and you […]

If a primary market offering is made to the general public (a public offering) it must be registered with the Securities Exchange Commission (SEC). SEC approval indicates the issuer has divulged sufficient information for the public to evaluate the offering. […]

Loaded up fund 12b-1 fee Expense ratio Front end load Economy fund 12b-1 fee Expense ratio Front end load Rate of return $$ Invested 100.00$ Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of .75%. […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. and identify the major types of investment policies of mutual funds. They should be able to understand the implications of […]

2. Close-end funds trade on the open market and are thus subject to market pricing. Open- end funds are sold by the mutual fund and must reflect the NAV of the investments. change due to asset trades, as does a […]

Probability Year end cash flow T-bill return Solution a. Required risk premium = Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $150,000, with equal probabilities of .5. The alternative riskless investment […]

is to calculate the expected return and risk of an individual security and to determine the return and risk of combinations of risky assets and risk-free investments. The chapter also presents historical return and risk data for some asset classes. […]

2. The geometric return represents a compounding growth number and will artificially inflate the annual performance of the portfolio. nominal rate for each. Just don’t mix and match! So the average excess return, the numerator of the Sharpe ratio, will […]

Building upon these concepts and upon the material in Chapter 5 (adding a risk-free asset to the portfolio and the reward-to-variability ratio), the student should be able to construct the optimal portfolio consisting of both risky and risk-free assets. Investors […]

2. The covariance with the other assets is more important. Diversification is accomplished via correlation with other assets. Covariance helps determine that number. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent […]

Market index portfolio standard deviation Stock A beta Stock A standard deviation Change in beta Change in standard deviation The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation […]

specific risk is low enough, the stock of Kaskin, Inc. could still have less total risk than that of Quinn, Inc. Statement c is incorrect. Lower beta means the stock carries less systematic risk. Copyright © 2017 McGraw-Hill Education. All […]

Market price of security Security expected rate of return Risk free rate of return Market risk premium Change in beta (x) Solution Current security beta #DIV/0! The market price of a security is $40. Its expected rate of return is […]

competition, it should be interpreted as an ideal that markets move toward but will probably never completely and consistently achieve. Nevertheless the financial markets are highly competitive and it is likely that markets will closely approach efficiency, the occasional bubbles […]

12% per year is only about 0.03% per day), so that on any day the price is virtually equally likely to rise or fall. However, over longer periods, the small expected daily returns cumulate, and upward moves are indeed more […]

finance may cite examples of market inefficiencies, but they give no insight into how to exploit such phenomenon. The strength of their argument relies upon observed market inefficiencies and unexplained market behavior. There are many anomalies, yet many can be […]

Chapter 09 – Behavioral Finance and Technical Analysis CHAPTER NINE BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS CHAPTER OVERVIEW The chapter describes the developing area of behavioral finance and describes some types of behavior that may lead to price movements being predictable. […]

Baa yield Aa yield Yield change Suppose Baa-rated bonds currently yield 7%, while Aa-rated bonds yield 5%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What would happen […]