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11-22 What are some products and services that you, as an individual investor, can now
obtain online?
Whatever there is, it is available online. Some commonly available stuff include brokerage
11-23 Briefly describe several types of online investment tools, and note how they can help
you become a better investor.
The Internet offers a wide array of tutorials, online classes, and articles to educate the novice
investor. Even experienced investors will find sites that expand their investing knowledge.
• The Motley Fool (http://www.fool.com) Fool’s School has sections on fundamentals of
• Morningstar (http://www.morningstar.com) provides comprehensive information on stocks,
• Zacks Investment Research (http://www.zacks.com) is an excellent starting place to learn what
• NASDAQ (http://www.nasdaq.com) has an Investor Resource section that helps with
Other good educational sites include, as noted above, leading personal finance magazines like
11-24 What is day trading, and how is it different from the more traditional approach to
investing?
The attraction of trading stocks online is so compelling that some investors have become day
traders. The opposite of buy-and-hold investors with a long-term perspective, day traders buy
11-24 Explain why it might be preferable for a person to invest in a portfolio of securities
rather than in a single security.
Don’t put all your eggs in one basket. In essence, a portfolio is a collection of investment
vehicles assembled to meet a common investment goal. But a portfolio is far more than a
collection of investments. It breathes life into your investment program as it combines your
personal and financial traits with your investment objectives to give some structure to your
11-25 Briefly describe the concept of asset allocation and note how it works.
The investor’s needs shape one’s financial goals. But to create a portfolio geared to those goals,
you need to develop an asset allocation strategy. Asset allocation involves a decision on how to
11-26 Discuss the role of asset allocation in portfolio management.
There’s overwhelming evidence that, over the long run, the total return on a portfolio is
11-27 What, if anything, can be gained from keeping track of your investment holdings?
Knowledge is power. If you do not know how you are doing, you do not if you need to make a
change in what you are doing. You need to monitor your portfolio by keeping track of what
Financial Planning Exercises
1. Calculate amount to invest to meet objectives. Use Worksheet 11.1 Alison Conroy is a young
career woman who’s now employed as the managing editor of a well-known business
journal. Although she thoroughly enjoys her job and the people she works with, what she
would really like to do is open a bookstore of her own. She would like to open her store in
about eight years and figures she’ll need about $50,000 in capital to do so. Given that she
thinks she can make about 10 percent on her money, use Worksheet 11.1 to answer the
following questions.
a. How much would Alison have to invest today, in one lump sum, to end up with $50,000 in
eight years?
PV = 1/(1 + .10)^8 = .466507; PV 50,000 = 50,000 * .488507 = $23,325.37
b. If she’s starting from scratch, how much would she have to put away annually to
accumulate the needed capital in eight years?
Using a financial calculator:
50,000
+/-
FV
c. How about if she already has $10,000 socked away; how much would she have to put
away annually to accumulate the required capital in eight years?
Using a financial calculator:
50,000 +/- FV
10,000 PV
d. Given that Alison has an idea of how much she needs to save, briefly explain how she
could use an investment plan to help reach her objective.
An investment plan is a statement, preferably written, that sets out how capital will be invested to
reach the financial goal. Once Alison decides on a course of capital accumulation, she must
Determining the Amount of
Investment Capital
Financial Goal: To accumulate $50,000 in 8 years
1. Targeted Financial Goal (see Note 1) $50,000
2. Projected Average Return on Investments 10%
A. Finding a Lump Sum Investment:
3. Future Value Factor, from Appendix A
2.144
4. Required Lump Sum Investment
line 1 / line 3 $23,321
B. Making a Series of Investments over Time:
7. Terminal Value of Initial Investment
line 5 * line 6 $21,144
8. Balance to Come from Savings Plan
line 1- line 7 $28,856
2. Interpreting stock quotes. Assume that the following quote for The Walt Disney Company,
a NYSE stock, appeared on May 1, 2015 (Friday) on Yahoo! Finance
(http://%nance.yahoo.com/q?s=DIS&ql=1):
The Walt Disney Company (DIS) - NYSE
110.52 <Up Arrow> 1.80 (1.66%) May 1, 4:01PM EDT
Prev Close 108.72 Day’s Range: 109.27 - 110.67
Open 109.79 52wk Range 78.54 – 111.66
Bid 110.81 x 400 Volume: 6,205,116
Given this information, answer the following questions.
a. At what price did the stock sell at the time of the quote?
b. What is the stock’s price/earnings ratio? What does that indicate?
Price Earnings Ratio is 24.57. This is the stock price of 110.52 divided by the Earnings Per
A company with no earnings has an unde@ned P/E ratio. By convention,
Either the stock is undervalued, or the company's earnings are thought to be
10–
17 For many companies a P/E ratio in this range may be considered fair value.
17–
25
Either the stock is overvalued or the company's earnings have increased since
the last earnings @gure was published. The stock may also be a growth stock
c. What is the last price at which the stock traded on the prior trading day?
d. What is the stock’s dividend yield?
1.10%, dividend divided by stock price 1.15/110.52 = 1.05% [Not certain why 1.10% is
e. What are the highest and lowest prices at which the stock traded during the latest
52-week period?
f. How large is the market capitalization of the company?
Market capitalization is the total stock outstanding times the current stock price. The table
3. Finding and interpreting stock quotes. Listed below are three pairs of stocks. Look at
each pair and select the security you’d like to own, given that you want to select the one
that’s worth more money. Then, after making all three of your selections, use The Wall Street
Journal or some other source to find the latest market value of the two securities in each
pair.
a. 50 shares of Berkshire Hathaway (stock symbol BRKA) or 150 shares of JP Morgan
Chase (stock symbol JPM). (Both stocks are listed on the NYSE.)
b. 100 shares of Home Depot (symbol HD), a NYSE stock; or 100 shares of Apple (symbol
AAPL), a NASDAQ stock and a member of the Dow Jones Industrial Average.
c. 150 shares of Wal-Mart (symbol WMT) or 50 shares of Facebook (symbol FB). (Both are
listed on the NYSE.)
How many times did you pick the one that was worth more money? Did the price of any of
these stocks surprise you? If so, which one(s)? Does the price of a stock represent its value?
Explain.
Berkshire Hathaway, Apple, and Facebook are high priced stock. Thus, the smaller number of
shares may very well be prices more than the higher number of shares. Whether the future value
of the stock will be the same, well it depends. Value is an estimation of the future cash flow
4. Market and limit orders. Suppose Gary Hooker places an order to buy 100 shares of The
Gap. Explain how the order will be processed if it’s a market order. Would it make any
difference if it had been a limit order? Explain.
The market order says to buy 100 shares at whatever the price is at that moment. The order is
given to a broker and in due course, the stock is purchased. There will most likely be a lag
With limit order to buy, the order specifies the highest price to pay. If the stock is available for
5. Calculating profits on margined and unmargined investments. Claire Gerber wants to buy
300 shares of Google, which is currently selling in the market for $537.34 a share. Rather
than liquidate all her savings, she decides to borrow through her broker. Assume that the
margin requirement on common stock is 50 percent. If the stock rises to $625 a share by
over the next year, show the dollar profit and percentage return that Claire would earn if
she makes the investment with 50 percent margin. Contrast these figures to what she’d
make if she uses no margin.
No Margin loan With Margin loan 50%
Cash invested 300 * $537.34 = $161,202 Only half, $80,601
Gain on stock $187,500 – 161,202 =
$26,298
$106,899 – 80,801 = $26,098
6. Calculating return on investment. Which of the following would offer the best return on
investment? Assume that you buy $5,000 in stock in all three cases, and ignore interest and
transaction costs in all your calculations.
a. Buy a stock at $60 without margin, and sell it a year later at $90.
b. Buy a stock at $20 with 50 percent margin, and sell it a year later at $30.
c. Buy a stock at $40 with 75 percent margin, and sell it a year later at $55.
7. Calculating short position profit. How much profit (if any) would Max Adler make if he
short-sold 300 shares of a stock at $100 a share and the price of the stock suddenly tumbled
to $70?
8. Calculating long and short position profits. Given that Hometown Care, Inc.’s stock is
currently selling for $40 a share, calculate the amount of money that Calvin Haskins will
make (or lose) on each of the following transactions. Assume that all transactions involve
100 shares of stock, and ignore brokerage commissions.
a. He short-sells the stock and then repurchases the borrowed shares at $50.
b. He buys the stock and then sells it some time later at $50.
c. He short-sells the stock and then repurchases the borrowed shares at $25.
9. Calculating short position cash ows and returns. Assume that an investor short-sells 500
shares of stock at a price of $85 a share, making a 50 percent margin deposit. A year later,
she repurchases the borrowed shares at $50 a share.
a. How much of her own money did the short-seller have to put up to make this
transaction?
The investor received 500 * 85 on the short sale, a total of $42,500. He had to make a margin
deposit of 50%, thus he gave the broker $21,250. At this point, the investor has not paid out any
b. How much money did the investor make, or lose, on this transaction?
c. What rate of return did she make on her invested capital (see part a)?
10. Rationale for stock exchange listings. Why do you suppose that large, well-known
companies such as Apple, Starbucks, and Facebook prefer to have their shares traded on
the NASDAQ rather than on one of the major listed exchanges, such as the NYSE (for
which they’d easily meet all listing requirements)? What’s in it for them? What would they
gain by switching over to the NYSE?
The NYSE has the most stringent listing requirements of all the organized exchanges. There is a
certain amount of prestige in being listed on the NYSE, because these companies have to have a
certain minimum size market capitalization as well as meet certain profitability levels. If listed
companies fall below these requirements, they stand to be delisted. However, even large,
11. Finding and applying market index quotes. Using a resource like The Wall Street
Journal or Barron’s (either in print or online), find the latest values for each of the
following market averages and indexes, and indicate how each has performed over the past
six months:
a. DJIA
b. Dow Jones Global Titans 50
c. S&P 500
d. NYSE Composite
e. NASDAQ Composite
f. S&P MidCap 400
g. Dow Jones Wilshire 5000
h. Russell 2000
With Google search engine, if the typical site like Yahoo.com does not report these indexes,
12. Finding stock quote information. Using the Web site for Yahoo! Finance
(http://finance.yahoo.com), find the 52-week high and low for Coca-Cola’s common stock
(symbol KO). What is the stock’s latest dividend yield? What was Coca-Cola’s most recent
closing price, and at what P/E ratio was the stock trading?
13. Interpreting stock report information. Using the S&P report in Exhibit 11.6, find the
following information for Apple.
a. What was the amount of revenues (i.e., sales) generated by the company in 2014?
b. What were the latest annual dividends per share and dividend yield?
c. What were the earnings (per share) projections for 2015?
d. How many common shareholders were there?
The number of shares outstanding is 5,824,700,000 of which 61% is owned by institutional
e. What were the book value per share and earnings per share in 2014?
f. Where is the stock traded?
g. How much long-term debt did the company have in 2014?
h. What was the company’s effective tax rate in 2014?
14. Tracking portfolio performance. Use Worksheet 11.2 to help Clayton and Julie Grover, a
married couple in their early 40s, evaluate their securities portfolio, which includes these
holdings.
a. IBM. (NYSE; symbol IBM): 100 shares bought in 2011 for $170.40 per share.
b. Verizon (NYSE; symbol VZ): 250 shares purchased in 2007 for $40.62 per share.
c. Procter & Gamble (NYSE; symbol PG): 150 shares purchased in 2010 at $61.85 per share.
d. Google (NASDAQ; symbol, GOOG): 200 shares purchased in 2014 at $519.98 per share.
e. The Grovers also have $8,000 in a bank savings account that pays 1.25 percent annual
interest.
1. Based on the latest quotes obtained from the Internet, complete Worksheet 11.2.
2. What’s the total amount the Grovers have invested in these securities, the annual income
they now receive, and the latest market value of their investments?
1. Worksheet 11.2 is below. If the stock has a stock dividend or stock split, the
number of shares may have changed from what is listed.
An Inventory of Investment Holdings
Names Clayton and Julie Grover Date
August 28, 2015
Type of
Investment
Description
of
Investment
Date
Purchase
d
Amount of
Investment
Overall
Return
Latest
Market
Value
Stock
Common
Stock
150 sh, PG 2010 $9,278 15.1% $10,682
2. Total amount invested, $148,469.
Annual income is not in the schedule. An additional column could be added to report the
dividends paid during the last year and the interest from the saving account. Similar
