Fundamentals of Investing 13th Edition

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 1 The Investment Environment 1.1 Learning Goal 1 1) A non-interest bearing checking account is still considered an investment. Answer: FALSE Learning Outcome: F-12

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 4) Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial Answer: TRUE Learning Outcome:

19 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 1.5 Learning Goal 5 1) U.S. Treasury Bills mature in 1 year or less. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial Answer:

Chapter 2 Securities Markets and Transactions 15 Chapter 1 The Investment Environment Outline Learning Goals I. Investments and the Investment Process A. Attributes of Investments 1. Securities or Property 2. Direct or Indirect 3. Debt, Equity, or Derivative Securities 4. Low- or High-Risk Investments 5. Short- or Long-Term Investments 6. Domestic or Foreign B. The Structure of the Investment Process Concepts

Suggested Answers to Discussion Questions 1.1 a. Since you fall into the category of a young investor, after meeting basic liquidity needs your key investment goals should be to save for the education of your children and quite possibly to purchase a house.. Appropriate investments should focus on longer term goals,

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 10 Fixed-Income Securities 10.1 Learning Goal 1 1) Bondholders can earn income both from interest and from capital gains. Answer: TRUE Learning Outcome: F-16

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 19) Lee is considering buying one of two newly-issued bonds. Bond A is a twenty-year, 7.5% coupon bond that is non-callable. Bond B is a twenty-year, 8.25% bond that is callable after two years.

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 3) In an inflationary environment, the interest payments on Treasury inflation-indexed obligations increase over time. Answer: TRUE Learning Outcome: F-06 Compare and contrast different types of bonds and explain why bond Answer: TRUE Learning

30 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 33) The first tranche of a collateralized mortgage obligation has A) the greatest default risk and the least prepayment risk. B) the greatest prepayment risk and default risk. C) the greatest prepayment risk and

Chapter 2 Securities Markets and Transactions 15 Chapter 10 Fixed-Income Securities Outline Learning Goals I. Why Invest in Bonds? A. A Brief History of Bond Prices, Returns and Interest Rates 1. Historical Returns 2. Bonds versus Stocks B. Exposure to Risk 1. Interest Rate Risk 2. Purchasing Power Risk 3. Business/Financial Risk 4. Liquidity Risk 5. Call Risk Concepts in Review II.

Chapter 10 Fixed-Income Securities 183 Suggested Answers to Discussion Questions 10.1 a. On average, total returns on bonds were much higher in the 1980s than in the 1970s. Interest rates in the bond market (i.e., bond yields) generally rose in the 1970s, which kept total bond returns relatively low. By

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 11 Bond Valuation 11.1 Learning Goal 1 1) The interest rate on the 10 year Treasury Bond has rarely fallen below the rate of

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 22) Market segmentation theory explains the typical upward sloping shape of yield curves as a function of A) normally greater demand for long-term bonds than for short-term notes. B) normally greater demand for short

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 13) If you are an income-oriented investor and you feel that interest rates are relatively high and will decline in the future, you should purchase A) zero-coupon, long-term bonds. B) long-term, non-callable bonds. C)

29 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 13) The duration of a bond will increase as the time to maturity ________ and/or as the YTM on the bond ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

Chapter 2 Securities Markets and Transactions 15 Chapter 11 Bond Valuation Outline Learning Goals I. The Behavior of Market Interest Rates A. Keeping Tabs on Market Interest Rates B. What Causes Interest Rates to Move? C. The Term Structure of Interest Rates and Yield Curves 1. Types of Yield Curves 2. Plotting Your Own Curves 3. Explanations of

Chapter 2 Securities Markets and Transactions 15 Solutions to Problems 11.1 Calculator solution is: N = 24I = 4PMT = 32.50FV = 1000 CPTPV = 885.65Alternatively you could use Excels present value function as follows: =pv(.04,24,32.50,1000,0) N = 24I = 4PMT = 32.50FV = 1000 CPTPV = 885.65Alternatively you could use Excels

Chapter 2 Securities Markets and Transactions 15 11.21 Expected Yield N = 3 PV= 800PMT = 80FV = 950CPTI = 15.38%In Excel use =rate(3,80,-800,1000) to find the expected ytm.Accrued interest = $80 9/12 = $60.00, Capital gain = $150HPR = ($60 + $150)/$800 = 26.25% PV= 800PMT = 80FV = 950CPTI =

Solutions to Case Problems Case 11.1 The Bond Investment Decisions of Dave and Marlene Carter In this case, the student is asked to evaluate two bond trading opportunitiesone involves using bonds to speculate on short-term interest rate movements, and the other deals with a bond swap. a. 1. The Carters are

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 12 Mutual Funds and Exchange-Traded Funds 12.1 Learning Goal 1 1) Mutual funds provide an affordable way to diversify a portfolio. Answer: TRUE Learning

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 19) Which of the following characteristics apply to exchange-traded funds (ETFs)? I. unlimited number of outstanding shares II. typically track the performance of some index III. market prices reflect demand for the fund

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 11) Value funds seek stocks I. with low dividend yields. II. with potential for growth. III. with low P/E ratios. IV. of newly discovered firms. A) I and III only B) II

31 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 12.5 Learning Goal 5 1) Mutual funds are used extensively as retirement investments. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial Answer: TRUE

37 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 7) Investors are generally well advised to avoid mutual funds with A) highly rated fund managers. B) low fees and high tax efficiency. C) consistently poor historical performance. D) good performance in both up

Chapter 2 Securities Markets and Transactions 15 Chapter 12 Mutual Funds and Exchange-Traded Funds Outline Learning Goals I. The Mutual Fund Concept A. An Overview of Mutual Funds 1. Pooled Diversification 2. Active versus Passive Management 3. Attractions and Drawbacks of Mutual Fund Ownership 4. Performance of Mutual Funds 5. How Mutual Funds Are Organized and Run 6. Open-

Chapter 12 Mutual Funds and Exchange-Traded Funds 233 Solutions to Problems 12.1 a. Return for the year (all changes on a per share basis): Change in price ($9.10 $8.50) $0.60Dividends received 0.90Capital gains distributions 0.75Total return $2.25Holding period return $2.25 26.47%$8.50 Change in price ($9.10 $8.50) $0.60Dividends received 0.90Capital gains distributions

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 13 Managing Your Own Portfolio 13.1 Learning Goal 1 1) Before analyzing needs and objectives, investors should first construct a portfolio. Answer: FALSE Learning

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 4) A rational investor will require the same return from a corporate security as from a government security. Answer: FALSE Learning Outcome: F-11 Explain the relationship between risk and return in capital markets Answer:

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 18) A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43. The risk free rate is 2.5%, the market rate of return is 11.4%, and the

29 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 19) Which of the following is ideally suited to automatic investing through a payroll deduction plan? A) a dollar cost averaging plan B) a constant dollar plan C) a constant ratio plan D) a

Chapter 2 Securities Markets and Transactions 15 Chapter 13 Managing Your Own Portfolio Outline Learning Goals I. Constructing a Portfolio Using an Asset Allocation Scheme A. Investor Characteristics and Objectives B. Portfolio Objectives and Policies C. Developing an Asset Allocation Scheme 1. Approaches to Asset Allocation a. Fixed Weightings b. Flexible Weightings c. Tactical Asset Allocation 2. Asset Allocation Alternatives 3.

252Smart/Gitman/Joehnk Fundamentals of Investing, Thirteenth Edition Solutions to Problems 13.1 Investor A would more likely be the retired couple because they would want to have low risk. Investor Bs portfolio is much riskier, with a portfolio beta of 1.66 versus 1.24 for Investor As portfolio. Investor Bs portfolio is much riskier,

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 14 Options: Puts and Calls 14.1 Learning Goal 1 1) Because puts and calls derive their value from the behavior of some other real

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 14) The option premium is A) the market price of the option. B) the amount by which the stock price is expected to move before the option expires. C) the fee charged by the

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 27) Which of the following variables are part of the Black-Scholes option pricing model? I. the market price of the underlying stock II. the volatility of the underlying security III. the strike price

31 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 7) Justin owns 400 shares of ORNG stock which he bought 10 months ago at $20 per share and has now risen to $35 per share. He is afraid the stock price will fall

Chapter 2 Securities Markets and Transactions 15 Chapter 14 Options: Puts and Calls Outline Learning Goals I. Call and PutOptions A. Basic Features ofCalls and Puts 1. The Option Contract 2. Seller versus Buyer 3. HowCalls and Puts Work 4. Advantages and Disadvantages B. Options Markets 1. Conventional Options 2. Listed Options C. Stock Options 1. Stock Option Provisions a. Strike Price b. Expiration Date 2.

Chapter 2 Securities Markets and Transactions 15 Solutions to Problems 14.1 Intrinsic value is $120 $117=$3 and time value is $12 $3=$9.On a contract basis, answers are $300 and $900.14.2 Out-of-the-money calls have no intrinsic value, and the entire price of the option ($230 per contract) is a time premium.14.3

14.14 Covered call writing: Current market price of the stock $61.50 Current market price of the call $5.75 Initial investment: $61.50 500 $30,750 a. If the stock price rises to $65 per share, the call options expire worthless: Value of the call $0 Profit: Quarterly dividends received $400Proceeds from sale of call 2,875Capital gains on stock [($65

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 15 Futures Markets and Securities 15.1 Learning Goal 1 1) All futures contracts trade continuously between 7:30 a.m. and 2:00 p.m., Monday through Friday.

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 17) Which of the following is(are) correct statements about the buyer of a futures contract? I. The contract buyer is short on the position. II. The contract buyer wants the price of the

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 13) George purchased a futures contract at 349. The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit. George sold the contract at 278. What is

28 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 12) Which one of the following statements concerning financial futures is correct? A) Speculators in the currency markets are generally firms involved with international trading of goods and services. B) Portfolio managers wishing to

Chapter 2 Securities Markets and Transactions 15 Chapter 15 Futures Markets and Securities Outline Learning Goals I. The Futures Market A. Market Structure 1. Futures Contracts a. Options versus Futures Contracts 2. Major Exchanges B. Trading in the Futures Market 1. Trading Mechanics 2. Margin Trading Concepts in Review II. Commodities A. Basic Characteristics 1. A Commodities Contract 2. Price Behavior 3. Return on

36Smart/Gitman/Joehnk Fundamentals of Investing, Thirteenth Edition Suggested Answers to Famous Failures in Finance Questions Federal regulation of derivatives businesses would probably have led to closer scrutiny and less egregious behavior by Enrons management. Faith in executives and financial statements was rocked to the core. While regulations can help the fraud

Web Chapter 16 Investing in Preferred Stocks Outline Learning Goals I. Preferred Stocks A. Preferred Stocks as Investments 1. Advantages and Disadvantages 2. Sources of Value B. Issue Characteristics 1. Rights of Preferred Stockholders 2. Preferred Stock Provisions Concepts in Review II. Valuing and Investing in Preferred Stocks A. Putting a Value on Preferred Stocks 1. Dividend Yield: A Key Measure of

Chapter 2 Securities Markets and Transactions 15 Web Chapter 17 Tax-Advantaged Investments Outline Learning Goals I. Tax Fundamentals A. Taxable Income B. Determining Taxable Income 1. Gross Income 2. Adjustments to Gross Income 3. Itemized Deductions 4. Exemptions 5. Taxable Income 6. Tax Credits 7. Taxes Due or Refundable 8. The Alternative Minimum Tax Concepts in Review II. Tax Strategies A. Tax Avoidance and

Web Chapter 17 Tax-Advantaged Investments 57 Suggested Answers to Discussion Questions 1. a. Exemptions claims reduce the amount of taxable income. They reduce taxes by the marginal tax rate times the amount allowed to be deducted. rate times the amount allowed to be deducted. rate times the amount allowed to be deducted. b.

Chapter 2 Securities Markets and Transactions 15 Web Chapter 18 Real Estate and Other Tangible Investments nChapter Outline Learning Goals I. Investing in Real Estate A. Investor Objectives 1. Investment Characteristics 2. Constraints and Goals B. Analysis of Important Features 1.Physical property 2.Property rights 3.Time horizon 4.Geographic area C. Determinants of Value 1. Demand 2. Supply 3. The Property a. Restrictions on Use b. Location c. Site d. Improvements e.

nSuggested Answers to Discussion Questions 1. a. Setting objectives involves two steps. In the first, you would consider the differences in the investment characteristics of real estate. In the second step, you would establish investment constraints and goals. The key characteristics of the two investment categories help to answer the

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 2 Securities Markets and Transactions 2.1 Learning Goal 1 1) Stocks, bonds and mutual fund shares are bought and sold in the capital market.

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 14) Market makers in dealer markets A) bring sellers and buyers together by matching offers. B) earn commissions paid by the sellers of securities. C) buy securities at a bid price and hope to

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 9) Which of the following can be encountered when investing in foreign markets? I. foreign taxation of dividends II. different accounting standards for financial disclosure III. restrictions on types of investments IV. illiquid

29 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 7) The minimum initial margin requirement for both long and short positions is set by the Federal Reserve Board and currently is 50%. Answer: TRUE Learning Outcome: F-11 Explain the relationship between risk and

Chapter 2 Securities Markets and Transactions 15 Chapter 2 Securities Markets and Transactions Outline Learning Goals I. Securities Markets A. Types of Securities Markets 1. The Primary Market a. Going Public: The IPO Process b. The Investment Bankers Role 2. The Secondary Market B. Broker Markets and Dealer Markets 1. Broker Markets 2. The New York Stock Exchange a. Trading Activity b.

Chapter 2 Securities Markets and Transactions 15 Suggested Answers to Discussion Questions 2.1 One reason for the large initial returns is the significant amount of hype surrounding new issues. This was especially true in the late 1990s, during what is now described as the tech-stock bubble. Investor demand for shares

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 3 Investment Information and Securities Transactions 3.1 Learning Goal 1 1) Most brokers charge higher commissions for on-line trades than for telephone transactions. Answer:

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 23) Current price information is found in which of the following? I. Dow Theory Letters II. Yahoo!Finance III. CNBC TV website IV. Hulbert Financial Digest A) II and III only B) I,

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 5) Stocks held in street name can be quickly sold online or by telephone. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial Answer: TRUE Learning Outcome:

31 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 24) Heather places an order to buy 525 shares of stock. This is an order for A) five round lots and one odd lot. B) 21 round lots of 25. C) one odd lot.

37 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 38) Angela placed a stop-limit order to sell 100 shares of RST stock at $28 when the market price of RST was $31. Shortly after Angela placed her order, trading on RST was halted

Chapter 2 Securities Markets and Transactions 15 Chapter 3 Investment Information and Securities Transactions Outline Learning Goals I. Investment Research and Planning A. Getting Started in Investment Research 1. Investment Education Sites 2. Investment Tools a. Planning b. Screening c. Charting d. Stock Quotes and Portfolio Tracking B. Pros and Cons of the Internet as an Investment Tool Concepts in Review

32Smart/Gitman/Joehnk Fundamentals of Investing, Thirteenth Edition Suggested Answers to Critical Thinking Question Hello, I am Tim, an Insider Trader Suppose you are on an airplane and you overhear two executives of a company talking about a merger that is about to take place. If you buy stock based on what

Appendix 4A The Time Value of Money 67 Appendix 4A The Time Value of Money Outline 4A-I. Interest: The Basic Return to Savers A. Simple Interest B. Compound Interest 4A-II. Computational Aids for Use in Time Value Calculations A. Financial Calculators B. Computers and Spreadsheets 4A-III. Future Value: An Extension of Compounding A. Calculator Use B. Spreadsheet Use 4A-IV. Future

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 4 Return and Risk 4.1 Learning Goal 1 1) Investors can be confidently predict future returns on an investment by studying its past performance.

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 3) If the risk-free rate of return is less than the inflation rate, the real rate of return is negative. Answer: TRUE Learning Outcome: F-05 Explain what determines interest rates and how changes in

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 16) If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the year and the stock is sold immediately after the dividend has been

31 Copyright 2017 Pearson Education, Inc. 10) Which of the following choices is in the correct order from less risk to more risk? A) corporate bonds, certificates of deposit, mutual funds that invest in stock, common stock B) certificates of deposit, corporate bonds, common stock, mutual funds that invest

Chapter 2 Securities Markets and Transactions 15 Chapter 4 Return and Risk Outline Learning Goals I. The Concept of Return A. Components of Return 1. Income 2. Capital Gains (or Losses) B. Why Return Is Important 1. Historical Performance 2. Expected Return C. Level of Return 1. Internal Characteristics 2. External Forces D. Historical Returns E. The Time Value of Money and Returns 1.

Chapter 2 Securities Markets and Transactions 15 Suggested Answers to Discussion Questions Answers to questions 1, 3, and 4 will vary according to students selections, tastes, and preferences. 4.2 a. Each investment pays a total of $1,000 over the four years. b. Investment #2 pays more money in the early years, so

48Smart/Gitman/Joehnk Fundamentals of Investing, Thirteenth Edition Solutions to Case Problems Case 4.1 Coatess Decision This case introduces the student to the concepts of opportunity cost and required rate of return. It further requires students to compute present values and select investments using the reasonable return approach discussed in the chapter. Year

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 5 Modern Portfolio Concepts 5.1 Learning Goal 1 1) Portfolio objectives should be established before beginning to invest. Answer: TRUE Learning Outcome: F-12 Discuss

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 6) A beta of 0.5 means that a stock is half as risky the overall market. Answer: TRUE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its Answer: TRUE

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 6) The risk premium to be used in the Capital Asset Pricing Model is calculated as (rrf-rm). Answer: FALSE Learning Outcome: F-11 Explain the relationship between risk and return in capital markets Answer: FALSE

28 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 10) Investors are rewarded for assuming A) total risk. B) diversifiable risk. C) nondiversifiable risk. D) any type of risk. Answer: C Learning Outcome: F-11 Explain the relationship between risk and return in capital

Chapter 2 Securities Markets and Transactions 15 Chapter 5 Modern Portfolio Concepts Outline Learning Goals I. Principles of Portfolio Planning A. Portfolio Objectives B. Portfolio Return and Standard Deviation C. Correlation and Diversification 1. Correlation 2. Diversification D. International Diversification 1. Effectiveness of International Diversification 2. Methods of International Diversification 3. Costs of International Diversification Concepts in Review II. The Capital Asset

Chapter 2 Securities Markets and Transactions 15 Solutions to Problems 5.1 Beginning Value Ending Value Return % 2013 $50,000 $55,000 10.0% 2014 $55,000 $58,000 5.5% 2015 $58,000 $65,000 12.1%2016 $65,000 $70,000 7.7%Average 8.8% 2015 $58,000 $65,000 12.1%2016 $65,000 $70,000 7.7%Average 8.8% 2015 $58,000 $65,000 12.1% 2016 $65,000 $70,000 7.7% Average 8.8% 5.2 Beginning Value Ending Value Return % Difference Squared 2013

Chapter 5 Modern Portfolio Concepts 75 5.19 a. If the market return increases by 13.2%, the table below shows the extent to which each securitys return will change in response: Security Beta Change in rm Change in ri A 1.4 13.2% 18.5%B 0.8 13.2% 10.6%C 0.9 13.2% 11.9% A 1.4 13.2% 18.5%B 0.8

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 6 Common Stocks 6.1 Learning Goal 1 1) Every shareholder is a part owner of the firm and, as such, has a direct claim

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 6) Stock held in treasury is a means of increasing the number of shares outstanding. Answer: FALSE Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them Answer: FALSE Learning Outcome:

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 15) You are given the following information on a company. Which one of the following statements is correct based on the information provided? A) The market price is $21.34 per share.

31 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 15) Investors seeking current income that tends to increase over time should purchase A) corporate bonds. B) income stocks. C) growth stocks. D) speculative stocks. Answer: B Learning Outcome: F-09 Discuss the fundamentals of

Chapter 2 Securities Markets and Transactions 15 Chapter 6 Common Stocks Outline Learning Goals I. What Stocks Have to Offer A. The Appeal of Common Stocks B. Putting Stock Price Behavior in Perspective C. From Stock Prices to Stock Returns D. A Real Estate Bubble Goes Bust and So Does the Market E. The Pros and Cons

Chapter 6 Common Stocks 101 Suggested Answers to Discussion Questions 6.1 a. Averaging the returns decade by decade since 1930, one gets 11.1% and the average annual return from 1900 to 2014 was 11.4%. Like most averages, these returns include over performing periods like the 1980s and 90s and underperforming

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 7 Analyzing Common Stocks 7.1 Learning Goal 1 1) The top down approach to security analysis starts with top management and then examines production

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 7) Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to I. be price leaders. II.

21 Copyright 2017 Pearson Education, Inc. 13) Return on equity can be expressed mathematically as "(net profit margin)(total asset turnover)(equity multiplier)." Answer: TRUE Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them Answer: TRUE Learning Outcome: F-09 Discuss the fundamentals of stocks and how to

29 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 40) Over the last 5 years, Spencer Inc.'s earnings have grown at an annual average rate of 9%. Current EPS are $1.80 and the company's stock recently sold for $36 per share. Spencer's PEG

Chapter 2 Securities Markets and Transactions 15 Chapter 7 Analyzing Common Stocks Outline Learning Goals I. Security Analysis A. Principles of Security Analysis 1. The Top-Down Approach to Security Analysis B. Who Needs Security Analysis in an Efficient Market? Concepts in Review II. Economic Analysis A. Economic Analysis and the Business Cycle B. Key Economic Factors C. Developing

Chapter 2 Securities Markets and Transactions 15 Suggested Answers to Critical Thinking Question Cooking the Books: What Were They Thinking? Will this regulation be able to eliminate conflict of interest? Discuss. Answer:In the wake of current accounting scandals, separation of internal and external audits and auditor independence have been the focus

7.17 a. All of the following ratios for Otago Bay Marine Motors are based on the 2015 and 2016 financial statements (dollars in thousands) and are computed using the formulas in the chapter: (1) Current ratio Current assets/Current liabilities 2015 $133,212/$22,498 5.92 2016 $111,914/$50,862 2.20 Industry 2.36 2015 $133,212/$22,498 5.92 2016 $111,914/$50,862

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 8 Stock Valuation 8.1 Learning Goal 1 1) The most important factors influencing a stock's current price are its past earnings and dividends. Answer:

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 5) Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model. Answer: TRUE Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 27) In applying the variable-growth dividend valuation model to a company's stock, analysts frequently define the growth rate, g, as equal to A) ROE multiplied by the firm's retention rate. B) ROE divided by

28 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 13) An internal rate of return (IRR) is the discount rate that A) represents the minimal rate required to create a positive net present value. B) is the minimal rate of return an investor

Chapter 2 Securities Markets and Transactions 15 Chapter 8 Stock Valuation Outline Learning Goals I. Valuation: Obtaining a Standard of Performance A. Valuing a Company Based on Its Future 1. Forecasted Sales and Profits 2. Forecasted Dividends and Prices a. Getting a Handle on the P/E Ratio b. A Relative Price-to-Earnings Multiple c. Estimating Earnings per Share d. Pulling

Chapter 2 Securities Markets and Transactions 15 Suggested Answers to Discussion Questions 8.1 Answers will vary by student. 8.1 Answers will vary by student. 8.1 Answers will vary by student. 8.2 a. 1.The value of a growth stock that pays little or nothing in dividends could be found using a A free

142Smart/Gitman/Joehnk Fundamentals of Investing, Thirteenth Edition 8.16 a. Valuation using the DVM: Intrinsic value D 1 r-g=D0(1+g) r-g Buggies-Are-Us: Intrinsic value $2.25(1 + 0) $22.50 0.10 0 = - Steady Freddie, Inc.: Intrinsic value $2.25(1 0.06) $2.385 $59.63 0.10 0.06 0.04 += = - Gang Buster Group: Step 1: Present value of dividends using a required rate of return

1 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Fundamentals of Investing, 13e (Smart) Chapter 9 Market Efficiency and Behavioral Finance 9.1 Learning Goal 1 1) In an efficient market, the only means of achieving high returns is to

11 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 4) Loss aversion is the behavior of excessively conservative investors. Answer: FALSE Learning Outcome: F-10 Discuss the causes and consequences of imperfect markets Answer: FALSE Learning Outcome: F-10 Discuss the causes and consequences of

21 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 9.5 Learning Goal 5 1) A principal objective of technical analysis is trying to determine when to invest. Answer: TRUE Learning Outcome: F-10 Discuss the causes and consequences of imperfect markets

28 Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. Copyright 2017 Pearson Education, Inc. 7) The advance/decline line is be used to time both the purchase and the sale of securities. Answer: TRUE Learning Outcome: F-10 Discuss the causes and consequences of imperfect markets Answer: TRUE Learning Outcome:

Chapter 2 Securities Markets and Transactions 15 Chapter 9 Market Efficiency and Behavioral Finance Outline Learning Goals I. Efficient Markets A. The Efficient Markets Hypothesis 1. Weak Form 2. Semi-Strong Form 3. Strong Form 4. Arbitrage and Efficient Markets B. Market Anomalies 1. Calendar Effects 2. Small-Firm Effect 3. Post Earnings Announcement Drift (or Momentum) 4. The Value Effect C. Possible Explanations II.

Chapter 2 Securities Markets and Transactions 15 Suggested Answers to Discussion Questions 9.1 Answers will vary by student. The main points to include would be: a. An efficient market is one in which securities fully reflect all possible information quickly and accurately. Both sides can argue security markets are or are

Solutions to Case Problems Case 9.1Brett Runs Some Technical Measures on a Stock a. RSI 100 [100/(1 APCup days/APCdown days)] APC Average price change Day of Period 11/30/1612/31/16 Advance Decline Advance Decline 1 0.55 0.752 0.10 0.753 0.15 0.254 0.20 0.505 0.10 1.0560.18 1.25 70.37 0.30 81.05 0.25 9 0.7510 0.25 0.90 11 0.25