Questions and Answers of Fundamentals Of Investments Valuation

Jpod experiences returns of 0 percent, 25 percent, or 50 percent, each with a one-third probability. What is the approximate return standard deviation for Jpod?a. 30 percentb. 25 percentc. 20
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Calculate the variance and standard deviation of a portfolio of 50 percent Roten and 50 percent Bradley. State of Economy Bust Boom Probability of State of Economy .40 .60 1.00 Security Returns if
In Example 11.3, what are the standard deviations of the two portfolios?Example 11.3Suppose we had the following projections on three stocks:We want to calculate portfolio expected returns in two
a. Fundamentally, why does diversification work?b. If two stocks have positive correlation, what does this mean?c. What is an efficient portfolio?
a. What is the Markowitz efficient frontier?b. Why is Markowitz portfolio analysis most commonly used to make asset allocation decisions?
In the example we just examined, Stock A has a standard deviation of 40 percent per year and Stock B has a standard deviation of 60 percent per year. Suppose now that the correlation between them is
Looking at Table 11.11, suppose you put 57.627 percent in the stock fund. What is your expected return? Your standard deviation? How does this compare with the bond fund?Table 11.11 Risk and Return
The best portfolios would be those that are described as having:a. The minimum risk for every level of return.b. Proportionally equal units of risk and return.c. The maximum excess rate of return
Looking back at Table 11.11, what combination of the stock fund and the bond fund has the lowest possible standard deviation? What is the minimum possible standard deviation?Table 11.11 Risk and
An investor is considering adding another investment to a portfolio. To achieve the maximum diversification benefits, the investor should add an investment that has a correlation coefficient with the
Starcents has an expected return of 25 percent, Jpod has an expected return of 20 percent, and the risk-free rate is 5 percent. You invest half your funds in Starcents and the other half in Jpod.
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have zero correlation. You invest half your funds in Starcents and the other half in
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have a correlation of +1. You invest half your funds in Starcents and the other half in
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have a correlation of −1. You invest half your funds in Starcents and the other half in
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have a correlation of −1. What is the minimum attainable return deviation for a
Which of the following portfolios cannot lie on the efficient frontier as described by Markowitz? a. b. C. d. Portfolio W X Y N Expected Return 9% 5 15 12 Standard Deviation 21% 7 36 15
Assume you are evaluating two stocks, Stock A and Stock B. Stock A has an expected return and standard deviation of 10 percent and 25 percent, respectively. Stock B has an expected return and
Suppose you observe the following situation:If the risk-free rate is 7 percent, are these two stocks correctly priced relative to each other? What must the risk-free rate be if they are correctly
According to the CAPM, what is the rate of return of a portfolio with a beta of 1?a. Between RM and Rfb. The risk-free rate, Rfc. Beta × (RM − Rf)d. The return on the market, RM.
Suppose Intel were to announce that earnings for the quarter just ending were up by 20 percent relative to a year ago. Do you expect that the stock price would rise or fall on the announcement?
A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?
Review the impact of recent earnings surprises on Coca-Cola (KO) stock.
Suppose the risk-free rate is 8 percent. The expected return on the market is 16 percent. If a particular stock has a beta of .7, what is its expected return based on the CAPM? If another stock has
The return on a stock is said to have which two of the following basic parts?a. An expected return and an unexpected returnb. A measurable return and an unmeasurable returnc. A predicted return
Suppose Intel were to unexpectedly announce that its latest computer chip contains a significant flaw in its floating point unit that makes it unable to handle numbers bigger than a couple of
A stock has an expected return of 8.0 percent, its beta is .60, and the risk-free rate is 3 percent. What must the expected return on the market be?
A news announcement about a stock is said to have which two of the following parts?a. An expected part and a surpriseb. Public information and private informationc. Financial information and
Consider the following information on two securities. Which has greater total risk? Which has greater systematic risk? Greater unsystematic risk? Which asset will have a higher risk premium? Security
A stock has an expected return of 12 percent and a beta of 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be?
Find the beta for Travelers (TRV) stock.
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?a. The stock price will
Suppose we have the following information:What is the expected return on this portfolio? What is the beta of this portfolio? Does this portfolio have more or less systematic risk than an average
Identify the equity risk premium for General Electric (GE).
A company announces that its earnings have decreased 25 percent from the previous year, but analysts expected a small increase. What is the likely effect on the stock price?a. The stock price will
Suppose we see that the reward-to-risk ratio for all assets equals 7.2. If the risk-free rate is 4 percent, what is the required return for an arbitrary Asset i with (1) a beta of 1? (2) a beta of 0?
a. How is beta similar to a slope coefficient?b. Within the context of correlation, how is it possible for a stock to have a high variance but still have a low beta?
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?a. The
A security is said to be overvalued relative to another security if its price today is too high given its expected return and risk. Suppose you observe the following:The risk-free rate is currently 6
An investor completed a factor analysis to evaluate the impact of earnings growth and cash flow yield on stock price performance. The factor analysis model provides estimates of the impacts of these
Suppose the risk-free rate is 4 percent, the market risk premium is 8.6 percent, and a particular stock has a beta of 1.3. Based on the CAPM, what is the expected return on this stock? What would the
The systematic risk of a security is also called its:a. Perceived risk.b. Unique or asset-specific risk.c. Market risk.d. Fundamental risk.
Which type of risk is essentially eliminated by diversification?a. Perceived riskb. Market riskc. Systematic riskd. Unsystematic risk.
The systematic risk principle states that:a. Systematic risk doesn’t matter to investors.b. Systematic risk can be essentially eliminated by diversification.c. The reward for bearing risk is
The systematic risk principle has an important implication, which is:a. Systematic risk is preferred to unsystematic risk.b. Systematic risk is the only risk that can be reduced by
A financial market’s security market line (SML) describes:a. The relationship between systematic risk and expected returns.b. The relationship between unsystematic risk and expected
Which of the following is not an implication of risk aversion for the investment process?a. The security market line is upward sloping.b. The promised yield on AAA-rated bonds is higher than on
In the context of capital market theory, unsystematic risk:a. Is described as unique risk.b. Refers to nondiversifiable risk.c. Remains in the market portfolio.d. Refers to the variability in all
Over the 96-year period 1926–2021, the geometric average return for large-company stocks was 10.5 percent and the arithmetic average return was 12.3 percent. Calculate average return forecasts
Look back to Figure 1.1 and find the value of $1 invested in each asset class over this 96-year period. Calculate the geometric return for small-company stocks, large-company stocks, long-term
Suppose you want to buy 10,000 shares of American Airlines (AAL) at a price of $30 per share. You put up $200,000 and borrow the rest. What does your account balance sheet look like? What is your
Barbara Analee, a registered nurse and businesswoman, recently retired at age 50 to pursue a life as a blues singer. She had been running a successful cosmetics and aesthetics business. She is
You bought 400 shares of Metallica Heavy Metal, Inc., at $30 per share. Over the year, you received $.75 per share in dividends. If the stock sold for $33 at the end of the year, what was your dollar
From Table 1.1, we see that the large-company stocks and long-term government bonds had these returns for the years 2012–2015:What are the average returns? The variances? The standard
The term growth stock is frequently a euphemism for small-company stock. Are such investments suitable for “widows and orphans”? Before answering, you should consider the historical volatility.
Calculate the geometric average return for the large-company stocks for the years 2012–2015 in Table 1.1.Table 1.1
Take a look back at Figure 1.1, which showed the value of a $1 investment after 96 years. Use the value for the small-company stock investment to check the geometric average in Table 1.5.Figure
You want to buy 1,000 shares of Devon Energy (DVN) at a price of $48 per share. You put up $36,000 and borrow the rest. What does your account balance sheet look like? What is your margin?
You purchased 500 shares of stock at a price of $56 per share on 50 percent margin. If the maintenance margin is 30 percent, what is the critical stock price?
A year ago, you bought 300 shares of Coca-Cola Co. (KO) at $55 per share. You put up the 60 percent initial margin. The call money rate plus the spread you paid was 8 percent. What is your return if
You have $26,000 and decide to invest on margin. If the initial margin requirement is 50 percent, what is the maximum dollar purchase you can make?
Suppose you short 2,000 shares of Under Armour (UA) at $15 per share. Six months later, you cover your short. If Under Armour is selling for $10 per share at that time, did you make money or lose
You buy 500 shares of stock at a price of $38 and an initial margin of 50 percent. If the maintenance margin is 35 percent, at what price will you receive a margin call?
Suppose you buy stock in Johnson & Johnson (JNJ) at a price of $60 per share. Three years later, you sell it for $64.50. No dividends were paid. What is your annualized return on this investment?
Mega Marketing, an advertising firm specializing in the financial services industry, has just hired Kinara Yamisaka. Ms. Yamisaka was a finance major in college and is a candidate for the CFA
Suzanne Harlan has a large, well-diversified stock and bond portfolio. She wants to try some alternative investments, such as hedge funds, and has contacted Lawrence Phillips, CFA, to help assemble a
The Madura HiGro Fund has a net asset value of $50 per share. It charges a 3 percent load. How much will you pay for 100 shares?
The contract size for platinum futures is 50 troy ounces. Suppose you need 300 troy ounces of platinum and the current futures price is $850 per ounce. How many contracts do you need to purchase? How
You purchase 10 call option contracts with a strike price of $60 and a premium of $1.95. If the stock price at expiration is $72, what is your dollar profit? What if the stock price is $57.95?
Suppose you purchase five December T-bond contracts at the prior settle price of 122’175. How much will you pay today? Suppose in one month you close your position and the December futures price at
Assume that you have identified three different stocks that you would like to purchase. You decide to buy 100 shares of each stock. Stock A is priced at $30; Stock B is priced at $40; and Stock C is
Suppose you want the right to sell 200 shares of Nike sometime before February 18, 2022, at a price of $140. In light of the information in Figure 3.5, what contract should you buy? How much will it
You plan to purchase Nike call options with a strike price of $140 and a current ask premium of $3.75 per share. If you buy 10 contracts, how much will you pay? Suppose that just as the option is
In Example 3.4, you bought two Nike 140 put contracts for $562. Suppose that the expiration date arrives and Nike is selling for $130 per share. How did you do? What’s the break-even stock price,
If you wanted to purchase the right to sell 2,000 shares of Target stock in March 2022 at a strike price of $210 per share, how much would this cost you?
In Problem 14, suppose Target stock sells for $200 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock
You purchase 25 call option contracts with a strike price of $45, a premium of $2.77, and four months until expiration.a. If the stock price at expiration is $52, what is your dollar (and percent)
Look up the management team for the Fidelity Magellan (FMAGX) mutual fund.
In our discussion above, suppose you were in a 37 percent tax bracket. Which type of fund is more attractive?
Which of the following is most true of a closed-end investment company?a. The fund’s share price is usually greater than net asset value.b. The fund’s share price is set equal to net asset
Suppose you purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2022, at an offering price of $47.10 per share. The front-end load for this fund is 5 percent, and the back-end load
Suppose there are only two stocks in the market and the following information is given:Construct price- and value-weighted indexes and calculate the percentage changes in each. Betty Co. Gray Bull,
Suppose there are only two stocks in the market and the following information is given:Construct price- and value-weighted indexes and calculate the percentage changes in each. Ally Co. McBeal,
Take a look back at Example 5.1. Suppose that Gray Bull splits 5-for-1. Based on beginning information, what is the new divisor?Example 5.1Suppose there are only two stocks in the market and the
In Problem 1, suppose that McBeal splits 3-for-1. Based on beginning information, what is the new divisor?Problem 1Suppose there are only two stocks in the market and the following information is
Beachwood Builders merged with Country Point Homes on December 31, 2002. Both companies were builders of midscale and luxury homes in their respective markets. In 2019, because of tax considerations
Suppose dividends for Layton’s Pizza Company are projected to grow at 6 percent forever. If the discount rate is 16 percent and the current dividend is $2, what is the value of the stock?
A company has a return on equity (ROE) of 20 percent, and from earnings per share of $5 it pays a $2 dividend. What is the company’s sustainable growth rate?a. 8 percentb. 10 percentc. 12
Identify the forecasted dividend for GE.
You plan to buy a common stock and hold it for one year. You expect to receive both $1.50 from dividends and $26 from the sale of the stock at the end of the year. If you wanted to earn a 15 percent
Suppose you buy some stock in Concannon Plastics for $35 per share. After one year, the price is $49 per share. During the year, you received a $1.40 dividend per share. What is the dividend yield?
Generate a histogram of the historical returns for the S&P 500 Index (SPX) over the last 10 years.
Using the following returns, calculate the arithmetic average returns, the variances, the standard deviations, and the geometric returns for the following stocks: Year 1 2 3 4 5 Michele,
a. With 20/20 hindsight, which investment category performed best for the period 1926–1935?b. Why doesn’t everyone just buy small-company stocks as investments?c. What was the smallest return
A portfolio of non-dividend-paying stocks earned a geometric mean return of 5 percent between January 1, 2010, and December 31, 2016. The arithmetic mean return for the same period was 6 percent. If
Suppose you buy stock in Moderna (MRNA) at a price of $28 per share. Four months later, you sell for $29.40 per share. No dividend is paid. What is your annualized return on this investment?
Calculate the total return for someone who held Intel (INTC) stock from January 2, 2019, to January 2, 2022.
a. What do we mean by excess return and risk premium?b. What is the historical risk premium on small-company stocks? On U.S. Treasury bonds?c. What is the first lesson from financial market history?
Which of the following statements about standard deviation is true? Standard deviation:a. Is the square of the variance.b. Can be a positive or negative number.c. Is denominated in the same units
Collect the current equity risk premiums for the United States and China.

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