Essentials of Investments 10th Edition

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 depends on the equity/debt ratio. D. decline by an amount that depends on the

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 30 years? A. Roth value is $5,307 higher B. Roth value is

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 her gain or loss due to exchange rate risk? A. $3,000

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, if interest rates increase to 9%, the value of the

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 is the portfolio value trigger point at this time that would

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 Answer: W Answer: W Answer: W Employers commonly match at least some portion of employee contributions to: I. 401k plans II.403b plans III. Self-directed

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 common stock? A. Stock A B. Stock B C. There is no difference between

__________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the options Answer: D. Answer: D. Answer: D. ______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector. A.

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) correct? I. One way to hedge your position would be to

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 Answer: D. Answer: D. Answer: D. A ______ insurance policy provides death benefits, with no buildup of

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 Answer: B. Answer: B. Answer: B. An investor can design a risky portfolio based on two stocks,

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 Answer: D. Answer: D. Answer: D. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2,

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 in P are 60% and 40%, respectively. X has an

A covered call strategy benefits from what environment? A. Falling interest rates B. Price stability C. Price volatility D. Unexpected events Answer: B. Answer: B. Answer: B. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A. 3.72% B. 4.23% C. 4.74% D. 4.90% Answer: C. Answer: C. Answer: C. Portfolio

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 Answer: D. Answer: D. Answer: D. Investing in two assets with a correlation coefficient of 1 will reduce which kind of

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 Answer: A. Answer: A. Answer: A. When the market is more optimistic about a firm, its share price will ______; as 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. the exercise price minus the stock price plus any expected dividends Answer: A. Answer:

An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0 Answer: C. Answer: C. Answer: C. Mutual funds provide the following for their shareholders. A. diversification B. professional management C. record keeping and administration D. all of these options Answer: D. Answer: D. Answer: D. A

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 Answer: D. Answer: D. Answer: D. The difference between balanced funds and asset allocation funds is that _____. A. balanced funds invest in bonds while asset allocation funds do

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 relative to the CPI of .8. If the risk-free rate

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 Answer: C. Answer: C. Answer: C. LIBOR is a key reference rate in the money markets. Many ______ of dollars of loans and derivative assets are tied

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 Answer: A. Answer: A. Answer: A. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A.

The most marketable money market security is _____. A. Treasury bills B. bankers' acceptances C. certificates of deposit D. common stock Answer: A. Answer: A. Answer: A. An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable

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 Answer: D. Answer: D. Answer: D. An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of

Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS Answer: C. Answer: C. Answer: C. An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________. A. sector rotation B. contraction/expansion analysis C. life-cycle analysis D. business-cycle shifting Answer: 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 D. portfolio management Answer: C. Answer: C. Answer: C. Moving to higher-yield bonds, usually

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 from inflation Answer: D. Answer: D. Answer: D. Which of the following is considered

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 Answer: A. Answer: A. Answer: A. Which of the following assets is most liquid? A. cash equivalents B. receivables C. inventories D.

Which of the following funds are usually most tax-efficient? A. equity funds B. bond Funds C. ETFs D. specialized-sector funds Answer: C. Answer: C. Answer: C. The term investment horizon refers to __________. A. the proportion of short-term to long-term investments held in an investor's portfolio B. the planned liquidation date of an investment C. the average

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 risk-free rate is 6%? A. .017 B. .028 C. .036 D. .078 Answer: B.Jensen meaBsure

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 Answer: A. Answer: A. Answer: A. A typical traditional initial investment in a hedge fund generally

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. II only B. I and III only C. II and III only D. I, II, and III

The Black-Scholes hedge ratio for a long call option is equal to __________. A. N(d1) B. N(d2) C. N(d1) - 1 D. Answer: A.N(d2) - 1 Answer: A.N(d2) - 1 Answer: A. N(d2) - 1 If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return

__________ 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 C. Market value per share D. Tobin's q Answer: B. Answer: B. Answer: B.

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 price data to answer the following questions. The cumulative rate of

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 Answer: D. Answer: D. Answer: D. The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis Corp.

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 increase in cost, and Japan will import less. C. U.S. goods will decrease

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 market line and the efficient frontier IV. The line with the steepest slope that

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 expiration date 1 year from now is worth $2.50 today.

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% Answer: A. Answer: A. Answer: A. Rank the interest sensitivity of the following from the most sensitive to an interest rate change

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 and IV only C. I, II, and III only D. I, II, III, and IV Answer: A. Answer:

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 with inflation D. who want to retire early Answer: B. Answer: B. Answer: B.

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. bottom-up B. outside-inside C. top-down D. upside-down Answer: C. Answer: C. Answer: C. The

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

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 on small-firm stocks and returns on large-firm stocks.) Answer: C. Answer: C. Answer: C.

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 Answer: C. Answer: C. Answer: C. The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in the markets C. the need for dealers to cover expenses and

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 Answer: D. Answer: D. Answer: D. During a period when prices have been rising, the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength

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 Answer: B. Answer: B. Answer: B. The return on the risky portfolio is 15%. 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 of your option position. You find the following option quotes: To

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 Answer: C. Answer: C. Answer: C. $1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years

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% Answer: C. Answer: C. Answer: C. In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend

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 6% and 6.71%, respectively. The confidence index _________ during August,

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. when the long-term direction of the market is stable D. good stocks without regard

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% Answer: C. Answer: C. Answer: C. Which of the following ETFs tracks the S&P 500 Index? A. Qubes B. Diamonds C. Vipers D.

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 of the securities' variance Answer: C. Answer: C. Answer: C. A time spread may

Hedge ratios for long calls are always __________. A. between -1 and 0 B. between 0 and 1 C. 1 D. greater than 1 Answer: B. Answer: B. Answer: B. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return

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% Answer: B. Answer: B. Answer: B. Recent analysis indicates that the style of investing is a critical component

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: G30:G48; Ctrl-C; Move to Cell J30; Ctrl-V] [Change

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 5; 10 100; 15 0]B B D D= =

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] [Select cells: G5:J64; Ctrl-D] G B F= Line 1 is the equation

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 of 8% on margin loans. a. How much of

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 placed in your margin account. a. How much do you

[Change cells: 2 80; 5 15]BB== [Change cells: 2 80; 5 15]BB== [Change cells: 2 80; 5 15]BB== 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

Now increase the interest rate: [Change cells: 6 6.5]B= Observe the difference in the output in cells E9 (104.79) and E7 (102.26) when the interest rate is 6.5%. The new difference of 2.53 shows an increase in the size of the time spread if interest rates increase. Now

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 .13]B B B= = = Overall performance and performance due

iii. [Sort by Column H] Jensen Alpha: Omicron, Momentum Watcher, Omega, Big Potential, S&P Index Return, Millennium, Alpha, Big Value iv. [Sort by Column I] M2 Measure: Millennium, Omega, Momentum Watcher, S&P Index Return, Big Potential, Alpha, Omicron, Big Value v. [Sort by Column J] T2 Measure1: Omicron, Momentum Watcher,

[Cell F12 = $B$3 + .01] Cell F13 automatically calculates the value of reinvested coupons after the rate increase. The value of reinvested coupons increases from $469.33 to $478.78 (a $9.45 increase) [Cell F12 = $B$3 + .01] 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"] [Select Chart "Portfolio Efficient Frontier; Move Pointer over three points along the blue efficient frontier, record risk

industry; and the rise of electronic trading, to name a few. In addition, the comprehensive section on risk now includes more detail on Value at Risk, (VaR). The IM makes extensive reference to the companion PowerPoint (PPT) files. In the PPT, we have chosen to provide high-level information while streamlining

Cash Computer equipment Bank loan Software cost # of Microsoft shares Microsoft price/share #DIV/0!b.Assets Liabilities & EquityCash -$ Software product -$ Bank Loan -$ Computer equipment -$ Shareholder's Equity -$ Total -$ -$ #DIV/0!c.Assets Liabilities & EquityCash -$ Microsoft shares -$ Software product -$ Bank Loan -$ Computer equipment -$ Shareholder's Equity -$ Total -$ -$

ownership interest. Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life. ownership interest. Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity

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New price $1,000.00Holding period return 0.00% New price $1,000.00Holding period return 0.00% New price $1,000.00 Holding period return 0.00% 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

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present value of that cash flow divided by the total present value of all cash flows. For cash flows in the distant future, present value approaches zero (i.e., the weight becomes very small) so that these distant cash flows have little impact, and eventually, virtually no impact on the weighted

future value of reinvestment income. Thus bond yields are subject to interest-rate risk even when coupon and principal payments are paid as promised. The text and the PPT present six rules of bond pricing: future value of reinvestment income. Thus bond yields are subject to interest-rate risk even when coupon

Tuition Interest rate New rate ( c 1 ) New rate ( c 2 ) Solution Year Tuition PV (CF) % CF Yr x %(CF) 2 -$ $0.00 #DIV/0! #DIV/0!$0.00 #DIV/0! #DIV/0!a.PV of obligation $0.00Duration #DIV/0!b.Immunization maturity #DIV/0! yearsFace value for immunization #DIV/0!c.0.0% value #DIV/0!PV Tuition $0.00Change #DIV/0!0.0% value #DIV/0!PV Tuition $0.00Change #DIV/0! 2 -$ $0.00 #DIV/0! #DIV/0!$0.00

companies within an industry or sector that has been identified as likely to perform well. A bottom-up approach typically emphasizes fundamental analysis of individual company stocks and is largely based on the belief that undervalued stocks will perform well regardless of the prospects for the industry or the broader economy.

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SolutionReal interest rate 0.00% SolutionReal interest rate 0.00% Solution Real interest rate 0.00% 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? a.ATech's degree of operating leverage#DIV/0!ZTech's degree of operating leverage #DIV/0!b. Higher profits = a.ATech's degree of operating leverage#DIV/0!ZTech's degree of

valuing expected dividends in the relatively more distant future. However, as a practical matter, such estimates of payments to be made in the more distant future are notoriously inaccurate, rendering dividend discount models problematic for valuation of such companies; free cash flow models are more likely to be appropriate. At

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P2 #DIV/0!Intrinsic value #DIV/0! P2 #DIV/0!Intrinsic value #DIV/0! P2 #DIV/0! Intrinsic value #DIV/0! 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 4% thereafter. If the required return

ROA 0.00% ROA 0.00% ROA 0.00% 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 operating ROA? ROE 0.00% ROE 0.00% ROE 0.00% Tax burden Leverage ratio Interest burden Return on sales Sales / $1

concept that firms must earn a higher return than on reinvested funds than the required return to add value is amply illustrated. The student should also be able to identify comparability problems across firms due to the varying generally accepted accounting principles available to the firm and understand that accounting

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options makes this strategy very risky and potentially very profitable. An example of a risk-reducing options strategy is a protective put strategy. Here, the investor buys a put on an existing stock or portfolio, with exercise price of the put near or somewhat less than the market value of the

Solutiona. Max loss $0.00b. Profit $0.00c. Break even 1 -$ Break even 2 -$ Solutiona. Max loss $0.00b. Profit $0.00c. Break even 1 -$ Break even 2 -$ Solution a. Max loss $0.00 b. Profit $0.00 c. Break even 1 -$ Break even 2 -$ Strike Premium Call Put -$ Stock price You establish a straddle

Ct = Price paid for a call option at time t. t = 0 is today, T = Immediately before the option's expiration. Pt = Price paid for a put option at time t. St = Stock price at time t. X = Exercise or Strike Price (X or E)

2. Using put-call parity: Put = C S0 + PV(X) + PV(Dividends) = $2.25 $33 + $35/(1 + .04)3/12 + 0 = $3.91 3. Using put-call parity: Put = C S0 + PV(X) + PV(Dividends) $2.50 = $3.00 S0 + $75/(1 + .08) + 0 S0 = $69.94 2. Using

Stock Price -$ Stock Price -$ Stock Price -$ 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 put option on Jupiter stock with an

SolutionMargin -$ Profit -$ Profit percentage #DIV/0! SolutionMargin -$ Profit -$ Profit percentage #DIV/0! Solution Margin -$ Profit -$ Profit percentage #DIV/0! 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

Loss = (1,850 1,800) $250 = $12,500 2. Futures price = S0 (1+ rf d)T = $1,800 (1 + .01 .02) = $1,782 Loss = (1,850 1,800) $250 = $12,500 2. Futures price = S0 (1+ rf d)T = $1,800 (1 + .01 .02) = $1,782 Loss = (1,850 1,800)

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added difference of providing a risk-adjusted measure of performance that can be easily interpreted as a differential return relative to a benchmark. Thus, it provides in a different format the same information as the Sharpe measure. added difference of providing a risk-adjusted measure of performance that can be easily interpreted

Alpha 0.00% Alpha 0.00% Alpha 0.00% 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 on the portfolio alpha. a benchmark portfolio, how best to choose a benchmark,

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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 35.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0!40.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0!45.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0! 35.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0!40.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0!45.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0! 35.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0! 40.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0! 45.00 #DIV/0! #DIV/0! #DIV/0!

investment opportunities. Technological advances have improved access to foreign markets and new instruments are constantly developing. It is worth stressing these days that well functioning markets contribute to wealth growth. Billions fewer people live in poverty because of globalization. Capital flows and markets that support them have financed this growth

exchange rates. If an investment were made in dollars, the business risk of the firm would be the only risk borne by the investor. If the investment is made in the local currency, the investor takes on both business risk and exchange rate risk. exchange rates. If an investment were

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 a. 0.00%b. 0.00%c. 0.00%d. 0.00% a. 0.00%b. 0.00%c. 0.00%d. 0.00% a. 0.00% b. 0.00% c. 0.00% d. 0.00% Higher yield Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay

nonvoting shares in a corporation, usually paying a fixed stream of dividends. While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons and return the face value of the bond at maturity. nonvoting shares in a corporation, usually paying a fixed stream of dividends. While

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# of contracts #DIV/0! # of contracts #DIV/0! # of contracts #DIV/0! 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 contracts should the fund sell

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term market-neutral refers to a portfolio position with respect to a specified market inefficiency. However, there could be a role for a market-neutral hedge fund in the investors overall portfolio; the market-neutral hedge fund can be thought of as an approach for the investor to add alpha to a more

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1. Moral hazard. The owner now has an incentive to cause a loss and file a claim. 1. Moral hazard. The owner now has an incentive to cause a loss and file a claim. 1. Moral hazard. The owner now has an incentive to cause a loss and file a

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process involves specifying investment objectives. Once the objectives are developed, constraints relevant for the investor must be identified. The next step in the process is the formulation of an investment policy consistent with the objectives and constraints. This is summarized in Table 22.2. Once a policy is established and put

general public. A seasoned issue is the issuance of stock by a company that has already undergone an IPO. general public. A seasoned issue is the issuance of stock by a company that has already undergone an IPO. general public. A seasoned issue is the issuance of stock by a

Interest payment -$ Rate of return #DIV/0!b. Margin call price #DIV/0! Interest payment -$ Rate of return #DIV/0!b. Margin call price #DIV/0! Interest payment -$ Rate of return #DIV/0! b. Margin call price #DIV/0! 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

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Solutiona. 1 year valueLoaded up fund 100.00$ Economy fund 100.00$ b. 3 year valueLoaded up fund 100.00$ Economy fund 100.00$ c. 10 year valueLoaded up fund 100.00$ Economy fund 100.00$ Solutiona. 1 year valueLoaded up fund 100.00$ Economy fund 100.00$ b. 3 year valueLoaded up fund 100.00$ Economy fund 100.00$

larger dollar volumes with brokerage firms. Services related to professional management and administration involve compensation for expertise. Investing in a fund family also confers some benefits. Advantages include professional administration of the account, records of all of your investments in one location, and keeping track of all of your distributions

transaction costs, tax benefits, and the ability to reduce administrative functions. The costs associated with investing in mutual funds are generally operating expenses, marketing, distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares. transaction costs, tax benefits, and the ability to reduce administrative functions.

Probability Year end cash flow Expected cash flow = -$ Portfolio cost = -$ b.#DIV/0!c.Expected cash flow = -$ Portfolio cost = -$ Expected rate of return = Required risk premium = Expected cash flow = -$ Portfolio cost = -$ b.#DIV/0!c.Expected cash flow = -$ Portfolio cost = -$ Expected

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does the magnitude of that return. Thus, a 1 percentile probability will produce a smaller VaR than a 5 percentile probability. does the magnitude of that return. Thus, a 1 percentile probability will produce a smaller VaR than a 5 percentile probability. does the magnitude of that return. Thus, a

As in Chapter 5, investors will optimally vary their asset-allocation decision according to their risk tolerance by varying the amount they invest in the tangency portfolio and the amount invested in the risk free asset. See Text figure 6.6. The single-factor-index model is introduced; which predicts stock returns based upon

diversification because returns on component securities will not move in perfect lockstep. The portfolio standard deviation will be less than a weighted average of the standard deviations of the component securities. diversification because returns on component securities will not move in perfect lockstep. The portfolio standard deviation will be less

Solutiona.Base case variance 0.00%Variance from beta change - 0.00%Variance from st. dev. Change 0% 0.00% Solutiona.Base case variance 0.00%Variance from beta change - 0.00%Variance from st. dev. Change 0% 0.00% Solution a. Base case variance 0.00% Variance from beta change - 0.00% Variance from st. dev. Change 0% 0.00% Market index portfolio standard deviation Stock A beta Stock A

5. $1 Discount Store is overpriced; Everything $5 is underpriced. 5. $1 Discount Store is overpriced; Everything $5 is underpriced. 5. $1 Discount Store is overpriced; Everything $5 is underpriced. specific risk is low enough, the stock of Kaskin, Inc. could still have less total risk than that of Quinn,

New security beta #DIV/0!Current dividend -$ New expected rate of return on security #DIV/0!New price of security #DIV/0! New security beta #DIV/0!Current dividend -$ New expected rate of return on security #DIV/0!New price of security #DIV/0! New security beta #DIV/0! Current dividend -$ New expected rate of return on security #DIV/0! New price of

concerned. However we may also ask a related question, Are the markets efficient allocators of capital? In other words do market prices accurately reflect the current value of risk-adjusted-expected-future cash flows? If they do then the markets are allocationally efficient. Markets could be allocationally inefficient, but still be informationally efficient.

returns from one period to predict returns in later periods and therefore earn abnormal profits. returns from one period to predict returns in later periods and therefore earn abnormal profits. returns from one period to predict returns in later periods and therefore earn abnormal profits. 12% per year is only

after the traders investing horizon. This limits the actions of arbitrageurs who take positions in mispriced securities. Thus, the bias may persist since no one takes advantage of it. after the traders investing horizon. This limits the actions of arbitrageurs who take positions in mispriced securities. Thus, the bias may

Psychologists also believe that individuals would tend to make less-than-fully-rational decisions even if they used perfect information processing. The impetus for the growth of behavioral research has been the dot-com and the housing bubbles. Whether behavioralism will remain as popular in todays environment remains to be seen. Extrapolation bias and

SolutionConfidence index (before change) #DIV/0!Confidence index (after change) #DIV/0! SolutionConfidence index (before change) #DIV/0!Confidence index (after change) #DIV/0! Solution Confidence index (before change) #DIV/0! Confidence index (after change) #DIV/0! 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,