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fundamentals of investments valuation
Questions and Answers of
Fundamentals Of Investments Valuation
Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case? AR A. B. ADEE C. Short-term interest rates increase unexpectedly. The interest rate
Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.'s stock to change price. A. B. C. D. PE E. The government announces
True or false: the most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
You own a stock portfolio invested 30 percent in Stock Q, 20 percent in Stock R, 10 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are 1.2, .6, 1.5, and .8,
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.6 and the total portfolio is exactly as risky as the market, what must the beta be for
A stock has a beta of 1.2, the expected retum on the market is 17 percent, and the risk-free rate is 8 percent. What must the expected return on this stock be?
A stock has an expected retum of 13 percent, the risk-free rate is 7 percent, and the market risk premium is 8 percent. What must the beta of this stock be?
A stock has an expected return of 17 percent, its beta is .9, and the risk- free rate is 7.5 percent. What must the expected return on the market be?
A stock has an expected retum of 22 percent, and a beta of 1.6, and the expected return on the market is 16 percent. What must the risk-free rate be?
A stock has a beta of .9 and an expected retum of 13 percent. A risk- free asset currently earns 7 percent. A. What is the expected retum on a portfolio that is equally invested in the two assets? B.
Asset W has an expected retum of 25 percent and a beta of 1.6. If the risk-free rate is 7 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.59 and an expected retum of 25 percent. Stock Z has a beta of .44 and an expected return of 12 percent. If the risk-free rate is 6 percent and the market risk premium is 11.3
Suppose you observe the following situation: Expected Security Beta Return Oxy Co. 1.35 23% More-On Co. .90 17
Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta?
According to the CAPM, what is the rate of retum of a portfolio with a beta of 1? a. b. c. d. between R and R the risk-free rate, R beta (R-R) the return on the market, R
The return on a stock is said to have which two of the following basic parts? a. b. C. d. an expected return and an unexpected retum a measurable return and an unmeasurable return a predicted return
A news announcement about a stock is said to have which two of the following parts? a. b. C. d. an expected part and a surprise public information and private information financial information and
A company announces that its earnings have increased 50 percent over the previous year, which matches analysts' expectations. What is the likely effect on the stock price? the stock price will
A company announces that its earnings have decreased 25 percent from the previous year, but analysts only expected a small increase. What is the likely effect on the stock price? a. the stock price
A company announces that its earnings have increased 25 percent from the previous year, but analysts actually expected a 50 percent increase. What is the likely effect on the stock price? the stock
A company announces that its earnings have decreased 50 percent from the previous year, but analysts only expected a 25 percent decrease. What is the likely effect on the stock price? a. the stock
The systematic risk of a security is also called its a. b. c. d. perceived risk unique or asset-specific risk market risk fundamental risk
The unsystematic risk of a security is also called its a. b. c. d. perceived risk unique or asset-specific risk market risk fundamental risk
Which type of risk is essentially eliminated by diversification? a. b. c. d. perceived risk market risk systematic risk unsystematic risk
The systematic risk principle states that a. systematic risk doesn't matter to investors b. C. d. systematic risk can be essentially eliminated by diversification the reward for bearing risk is
The systematic risk principle has an important implication, which is that a. b. C. d. systematic risk is preferred to unsystematic risk systematic risk is the only risk that can be reduced by
The systematic risk of a stock is measured by its a. b. C. d. beta coefficient correlation coefficient retum standard deviation retum variance
A financial market's security market line (SML) describes a. b. PSJP C. d. the relationship between systematic risk and expected returns the relationship between unsystematic risk and expected
In the capital asset pricing model (CAPM), a security's expected retum is a. b. C. d. the return on the market portfolio the risk-free rate plus the return on the market portfolio the return on the
Netcap has an expected retum of 25 percent and Jmart has an expected retum of 20 percent. What is the likely investment decision for a risk-averse investor? a. b. invest all funds in Netcap invest
Netcap experiences returns of 5 percent or 45 percent, each with an equal probability. What is the retum standard deviation for Netcap? a. b. C. d. 30 percent 25 percent 20 percent 10 percent
Jmart experiences returns of 0 percent, 25 percent, or 50 percent, each with a one-third probability. What is the approximate retum standard deviation for Jmart? a. b. C. d. 30 percent 25 percent 20
An analyst estimates that a stock has the following return probabilities and returns, depending on the state of the economy: State of Economy Probability Retum Good .1 15% Normal .6 13 Poor .3 7 What
Netcap has an expected retum of 25 percent, Jmart has an expected return of 20 percent, and the risk-free rate is 5 percent. You invest half your funds in Netcap and the other half in Jmart. What is
Both Netcap and Jmart have the same return standard deviation of 20 percent, and Netcap and Jmart returns have zero correlation. You invest half your funds in Netcap and the other half in Jmart. What
Both Netcap and Jmart have the same retum standard deviation of 20 percent, and Netcap and Jmart returns have a correlation of +1. You invest half your funds in Netcap and the other half in Jmart.
Both Netcap and Jmart have the same retum standard deviation of 20 percent, and Netcap and Jmart returns have a correlation of -1. You invest half your funds in Netcap and the other half in Jmart.
Both Netcap and Jmart have the same return standard deviation of 20 percent, and Netcap and Jmart returns have zero correlation. What is the minimum attainable retum variance for a portfolio of
Both Netcap and Jmart have the same retum standard deviation of 20 percent, and Netcap and Jmart returns have a correlation of -1. What is the minimum attainable retum variance for a portfolio of
Stocks A, B, and C each have the same expected retum and standard deviation. The following shows the correlations between retums on these stocks. Stock A Stock B Stock C Stock A +1.0 Stock B +0.9
If the retums on two stocks are highly correlated, what does this mean? If they have no correlation? If they are negatively correlated?
Given the following information, calculate the expected return and standard deviation for a portfolio that has 40 percent invested in Stock A, 30 percent in Stock B, and the balance in Stock C. State
Use the following information to calculate the expected retum and standard deviation of a portfolio that is 40 percent invested in Kuipers and 60 percent invested in SuCo: Kuipers SuCo Expected
Fill in the missing information assuming a correlation of -.10. Stocks 1.00 Portfolio Weights Expected Standard Bonds Return Deviation 14% 20% 0.80 0.60 0.40 0,20 0.00 5% 8%
True or false: If the two stocks have the same expected retum of 12 percent, then any portfolio of the two stocks will also have an expected retum of 12 percent.
True or false: If the two stocks have the same standard deviation of 45 percent, then any portfolio of the two stocks will also have a standard deviation of 45 percent.
You manage a $100 million stock portfolio with a beta of .8. Given a contract size of $100,000 for a stock index futures contract, how many contracts are needed to hedge your portfolio? a. 8 b. 80 c.
You manage a $100 million bond portfolio with a duration of 9 years. You wish to hedge this portfolio against interest rate risk using T-bond futures with a contract size of $100,000 and a duration
You are short 20 gasoline futures contracts, established at an initial settle price of .545 (see Figure 16.1 for contract specifications). Your initial margin to establish the position is $1,200 per
Suppose you purchase five call contracts on Macron Technology stock. The strike price is $50, and the premium is $2. If, at expiration, the stock is selling for $60 per share, what are your call
Suppose you purchase eight put contracts on Testaburger Co. The strike price is $30, and the premium is $3. If, at expiration, the stock is selling for $20 per share, what are your put options worth?
Stock in Cheezy-Poofs Manufacturing is currently priced at $100 per share. A call option with a $100 strike and 90 days to maturity is quoted at $5. Compare the percentage gains and losses from a
In Problem 6, suppose that Hendreeks stock is selling for $95 per share on the expiration date. How much is your options investment worth? What if the terminal stock price is $86?
In Problem 8, suppose you write 25 of the August 80 put contracts. What is your net gain or loss if Hendreeks is selling for $55 at expiration? For $100? What is the break-even price, that is, the
Suppose you write 20 call option contracts with a $40 strike. The premium is $2. Evaluate your potential gains and losses at option expiration for stock prices of $30, $40, and $50.
Suppose you write 10 put option contracts with a $20 strike. The premium is $1. Evaluate your potential gains and losses at option expiration for stock prices of $10, $20, and $30.
You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What's wrong here? Describe how would
A call option sells for $4. It has a strike price of $40 and six months to maturity. If the underlying stock currently sells for $30 per share, what is the price of a put option with a $40 strike and
What is the value of a call option if the underlying stock price is $200, the strike price is $180, the underlying stock volatility is 40 percent, and the risk-free rate is 4 percent? Assume the
You wish to hedge a stock portfolio, where the portfolio beta is 1, the portfolio value is $10 million, the hedging index call option delta is .5, and the hedging index call option contract value is
A call option is currently selling for $10. It has a strike price of $80 and three months to maturity. What is the price of a put option with a $80 strike and three months to maturity? The current
A call option currently sells for $10. It has a strike price of $80 and three months to maturity. A put with the same strike and expiration date sells for $8. If the risk-free interest rate is 4
What is the value of a call option if the underlying stock price is $100, the strike price is $70, the underlying stock volatility is 30 percent, and the risk-free rate is 5 percent? Assume the
What is the value of a call option if the underlying stock price is $20, the strike price is $22, the underlying stock volatility is 50 percent, and the risk-free rate is 4 percent? Assume the option
What is the value of a put option if the underlying stock price is $60, the strike price is $65, the underlying stock volatility is 25 percent, and the risk-free rate is 5 percent? Assume the option
A put on XYZ stock with a strike price of $40 is priced at $2.00 per share, while a call with a strike price of $40 is priced at $3.50. What is the maximum per- share loss to the writer of the
If a stock is selling for $25, the exercise price of a put option on that stock is $20, and the time to expiration of the option is 90 days, what are the minimum and maximum prices for the put today?
Which of the following is the oldest and currently the most active futures exchange in the United States? a. b. c. d. Kansas City Board of Trade (KBOT) Chicago Mercantile Exchange (CME) New York
The first financial futures contracts, introduced in 1972, were a. b. C. d. currency futures at the CME interest rate futures at the CBOT stock index futures at the KBOT wheat futures at the CBOT
Which of the following statements is true regarding the distinction between futures contracts and forward contracts? a. b. C. d. futures contracts are exchange-traded, whereas forward contracts are
In which of the following ways do futures contracts differ from forward contracts? a. b. C. d. I. II. III. Futures contracts are standardized For futures, performance of each party is guaranteed by a
Initial margin for a futures contract is usually a. b. C. d. regulated by the Federal reserve less than 2 percent of contract value in the range between 2 percent to 5 percent of contract value in
Which of the following statements is false about futures account margin? a. b. PROD c. d. initial margin is higher than maintenance margin a margin call results when account margin falls below
Which of the following contract terms changes daily during the life of a futures contract? a. b. C. d. futures price futures contract size futures maturity date underlying commodity
Which of the following is the least essential thing to know about a futures trading account? a. b. C. d. margin is required futures accounts are marked-to-market daily a futures position can be
On the maturity date, stock index futures contracts require delivery of: a. b. C. d. common stock common stock plus accrued dividends Treasury bills cash
On the maturity date, Treasury note futures contracts require delivery of: a. b. c. Treasury notes plus accrued coupons over the life of the futures contract Treasury notes Treasury bills d. cash
A Treasury bond futures contract has a quoted price of 100. The underlying bond has a coupon rate of 7 percent and the current market interest rate is 7 percent. Spot-futures parity then implies a
A stock index futures contract maturing in one year has a currently traded price of $1,000. The cash index has dividend yield of 2 percent and the interest rate is 5 percent. Spot-futures parity then
Which of the following is not an input needed to calculate the number of stock index futures contracts required to hedge a stock portfolio? a. b. C. d. the value of the stock portfolio the beta of
Using Figure 16.1, answer the following questions: a. b. C. d. P How many exchanges trade wheat futures contracts? If you have a position in 10 gold futures, what quantity of gold underlies your
Using Figure 16.1, answer the following questions: a. b. C. d. What was the settle price for September 1999 corn futures on this date? What is the total dollar value of this contract at the close of
You are long 20 March 1999 oats futures contracts. Calculate your dollar profit or loss from this trading day.
You are short 15 December 1999 corn futures contracts. Calculate your dollar profit or loss from this trading day.
You are short 30 June 1999 five-year Treasury note futures contracts. Calculate your profit or loss from this trading day.
Kellogg's, the breakfast cereal manufacturer, uses large quantities of corn in its manufacturing operation. Suppose the near-term weather forecast for the corn-producing states is drought-like
Jed Clampett just dug another oil well, and, as usual, it's a gusher. Jed estimates that in two months, he'll have 2 million barrels of crude oil to bring to market. However, Jed would like to lock
Referring to Figure 16.1, what is the total open interest on the Deutschemark contract? Does it represent long positions or short positions or both? Based on the settle price on the December
Suppose the initial margin on heating oil futures is \($1,000,\) the maintenance margin is \($750\) per contract, and you establish a long position of five contracts today (see Figure 16.1 for
Is it true that a futures contract is a zero-sum game, meaning that the only way for a buyer to win is for a seller to lose, and vice versa?
Suppose a futures contract exists on IBM stock, which is currently selling at $90 per share. The contract matures in three months, the risk-free rate is 6 percent annually, and the current dividend
Suppose the CAC-40 index (a widely-followed index of French stock prices) is currently at 1800, the expected dividend yield on the index is 3 percent per year, and the risk-free rate in France is 6
You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1,15 measured relative to the
Suppose the 90-day S&P 500 futures price is 1200 while the cash price is 1,194. What is the implied difference between the risk-free interest rate and the dividend yield on the S&P 500?
Suppose you want to hedge a $600 million bond portfolio with a duration of 6 years using 10-year Treasury note futures with a duration of 9 years, a futures price of 102, and 90 days to expiration.
Complete the following sentence for each of these investors:The (buyer/seller) of a (put/call) option (pays/receives) money for the (right/obligation) to (buy/sell) a specified asset at a fixed price
Suppose you buy 60 February 80 call option contracts. How much will you pay, ignoring commissions?
Suppose you buy 25 August 80 put option contracts. What is your maximum gain? On the expiration date, Hendreeks is selling for $55 per share, How much is your options investment worth? What is your
Buying a put option on a stock is sometimes called "stock price insurance." Why?
What is the intrinsic value of a call option? How do we i interpret this value?
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