- To illustrate the leverage impact, assume that the stock in Example 5‐3 goes up 20 percent from $90 to $108, for a gain of $18 × 100 shares, or $1,800. The investor has a $1,800/$4,500 = 40
- Assume in the previous example that the maintenance margin is 30 percent. If the price of the stock drops to $75, the actual margin percentage will be 40.0 percent [($7,500 − $4,500)/$7,500].
- Confirm the expected portfolio returns in column 1. The correlation coefficient, ρ, is 0.15. Return (%) Standard deviation (%) Covariance EG&G 25 30 112.5 GF 23 25
- Based on your analysis, you think that next year’s return for General Foods will range from 1 to 15 percent as described earlier. The expected value of the probability distribution for General
- The variance and standard deviation for General Foods, using the information reported above, is calculated in Table 7-1.Table 7-1 TABLE 7-1 Calculating the Standard Deviation Using Expected
- With equal dollar amounts invested in three securities, the portfolio weights are 0.333, 0.333, and 0.333. For an equal‐weighted portfolio of five securities, each security would have a portfolio
- Consider a three‐stock portfolio consisting of stocks G, H, and I with expected returns of 12, 20, and 17 percent, respectively. Assume that 50 percent of investable funds are invested in security
- The risk of a portfolio declines quickly as more securities are added. Using Equation 7-8 and assuming that each security’s standard deviation is 20 percent, the risk of a 100‐security portfolio
- Consider the returns between Southeast Utilities and Precision Instruments for the period 2005–2014. The summary statistics for these two stocks are as follows:Assume, for expositional purposes, we
- Extending Example 7-6, the correlation between Southeast Utilities and Precision Instruments returns is +0.29. In order to focus on the effects of a changing correlation coefficient, we continue to
- Using the same data as Example 7-7, let’s consider portfolio risk. Recall that the correlation coefficient between Southeast Utilities and Precision Instruments is +0.29. For illustration purposes,
- An analyst considering 100 securities must estimate [100(99)]/2 = 4,950 unique covariances. For 250 securities, the number is [250(249)]/2 = 31,125 unique covariances.
- Consider the 25‐month bear market that occurred during 2000–2002. A 100 percent stock portfolio (Wilshire 5000 Index) would have lost about 44 percent of its value, while an investor who chose a
- Consider the period around the 2008 financial crisis. The stock market hit a record high on October 9, 2007, and officially entered a declining phase by June 30, 2008. The typical U.S. stock index
- Assume that the expected return on portfolio M is 13 percent, with a standard deviation of 20 percent, and that RF is 5 percent. The slope of the CML isIn our example, a risk premium of 0.40
- In Figure 9‐5, Security A’s beta of 1.5 indicates that, on average, Security A’s returns exhibit 1.5 times the average sensitivity to market return changes, both up and down. A security whose
- To illustrate the estimation of the market model, we use return data for the Coca‐Cola company (ticker symbol “KO”). Fitting a regression equation to 60 months of return data along with
- In Figure 9‐8, Investor G plots two securities relative to the SML. Based on Investor G’s analysis, Security X has a relatively high estimated return derived from fundamental analysis and plots
- Assume that the beta for IBM is 1.15. Also assume that RF is 5 percent and that the expected return on the market is 12 percent. The required return for IBM can be calculated as KIBM = 0.05 +
- An investor holds a portfolio of stocks that she thinks is influenced by only two basic economic factors—inflation and the economy’s output. Diversification once again plays a role, because the
- Assume Magna Corporation annual‐pay preferred stock has a 7 percent dividend rate and a $100 par value. If an investor’s required return on Magna preferred is 8.5 percent, the investor’s
- Assume that Summa Corporation is currently paying $1 per share in dividends and investors expect dividends to grow at the rate of 7 percent a year for the foreseeable future. For investments at this
- For Summa, the estimated value today, V0 , is $13.38 , and for the end of Period 1, using D2 in the numerator of Equation 10-5, it isThis estimated value at the end of Period 1 is 7 percent higher
- For Summa, assume that the discount rate used, k, is 16 percent instead of 15 percent, with other variables held constant: In this example, a 1‐percentage‐point increase in k results in an 11.14
- Assume that for Summa the growth rate, g, is 8 percent instead of 7 percent, with other variables held constant: In this example, a 1‐percentage‐point increase in g results in a 15.3 percent
- Assume that for Summa the discount rate increases to 16 percent, and the growth rate declines to 4 percent: Vo $1(1.04) 0.16 0.04 = $8.67
- In early 2012, Standard & Poor’s estimated 2012 earnings for Cliff’s Natural Resources (CLF) of $12.18. S&P estimated an appropriate P/E for CLF to be 7.8. Multiplying these two numbers together
- In November 2014, J.P. Morgan Chase had a P/B ratio of 1.1, whereas Coca‐Cola’s P/B was 5.8, and the average P/B for the S&P 500 was 2.4. Differences in the level of fixed assets and capital
- In November 2014, Amazon had an enterprise value to EBITDA (EV/EBITDA) ratio of 38.4, whereas Barnes & Noble’s EV/EBITDA was 4.7. This dramatic difference in ratios reflects, among other things,
- Between January 1998 and March 2000, the Amex Internet Index rose from 87 to 689. Therefore, in just over two years, this index showed a gain of almost 700 percent. Such was the euphoria that
- At the peak of the NASDAQ market rise, which occurred on March 10, 2000, Cisco had a P/E ratio of about 150, Yahoo about 650, and JDS Uniphase about 640. One year later, the same companies had P/E
- Consider the performance of the T. Rowe Price Growth and Income Fund for a recent multi-year period, as shown in Figure 11-1. Notice how this fund’s total returns and the total returns for the S&P
- Google went public in August 2004 at $85, a price regarded by many at the time as ridiculously high. By May of 2005, the price had tripled. By late 2007, the price was over $600 a share but fell
- Perhaps the best foreign example of the impact of the overall market on investors is Japan. In the 1980s, Japan seemed invincible in its economic performance, and the Nikkei stock index reflected
- Think of one investor allocating her portfolio as 90 percent NASDAQ stocks and 10 percent cash equivalents and another investor doing the opposite, 90 percent cash equivalents and 10 percent NASDAQ
- Vanguard offers a large selection of index funds, which allows investors to duplicate various market segments at a very low cost. Some examples are as follows: 1. The 500 Index Portfolio consists of
- Technical analysts look for patterns in stock prices that can be exploited. Figure 12‐3 shows 30 days of price changes for Botox Company. Notice that in every case but one, whenever the price
- Although an extreme example, the Boston Company International Small‐Cap fund had a 2007 distribution equal to $23.17 per share. If, earlier that year, you had invested $100,000 in the fund, your
- Suppose an analyst wants to study the relationship between earnings surprises and stock prices. An event study would quantify the relationship between quarterly earnings announcements (which contain
- The Motley Fool is a popular and well‐known source of investment information and ideas for individual investors. Operating a website and also producing some books and other publications, this
- In March 2001, following the stock market plunge and weakening of the economy, it was reported that the index of leading economic indicators declined in February for the fourth time in five months.
- The business cycle–stock‐price relationship is illustrated by what happened in 2000–2001. Following a strong run‐up in the late 1990s, the U.S. stock market peaked in March 2000, and the
- The S&P 500 increased about 150 percent between the end of 1994 and December 1998. Stock prices are a function of both corporate earnings and the P/E ratio. At the end of 1994, the P/E based on
- Consider the following headlines from financial media: “Markets Fall on Absence of Rate Cut” “Recent Rise in Long‐Term Interest Rates May Mean Trouble for the Stock Market” “As
- Consider the medical appliances and equipment industry. Intuitive Surgical, Inc. (ISRG) pioneered a robotic surgery machine that revolutionized certain surgical procedures by making possible only
- Consider General Electric, a classic industrial company that has been in business for more than 100 years. Today it is well known for making CT scanners, jet engines, locomotives, gas turbines,
- Using NAICS codes, the plastics product manufacturing industry is coded 3261. Within this code are several breakdowns, including, among others, plastic pipe and pipe fitting manufacturing (326122),
- Would it surprise you to learn that in early 2012 the home building industry was ranked next to last out of all industries ranked by The Value Line Investment Survey? Probably not, given what
- In certifying Coca‐Cola’s financial statements, the accounting firm preparing the statements makes a statement such as, “In our opinion, the reported financial statements present fairly, in all
- FAS 133, which is concerned with financial derivatives and hedging, was issued in June 1998. The standard and its supporting documents now total more than 800 pages. There have been over 200
- For a take on earnings quality, consider J.P. Morgan Chase’s 2011 third‐quarter earnings report. The company raised its quarterly earnings by almost $2 billion by using a debit valuation
- Using the data for Coca‐Cola from Exhibits 15‐1 and 15‐2 (all $ values in billions):Substitute the following for the equations: Exhibits 15‐1Exhibits 15‐2 Net income/sales =
- Using data from Exhibits 15‐2 and 15‐3, the FCFF and FCFE for Coca‐Cola for 2014 are as follows (all $ values in billions):FCFF is generally greater than FCFE; however, in this case, the low
- Assume that the current one‐year bond rate (tR1) is 7 percent and the two forward rates are 7.5 percent (t+1r1) and 8.2 percent (t+2r1). The rate for a three‐year bond, (1+tR3), would be R3 =
- To calculate the RCY an investor would earn from a 12 percent reinvestment rate, add the total return from coupons shown in Table 17‐1, $7,738, to the maturity value of the bond, $1,000, to obtain
- To obtain an idea of the returns that can result from changes in interest rates, consider longterm T‐bond returns over some selected years. In 1982, the return from long‐term T‐bond funds was
- For the Pfizer options referenced earlier:Time value of March 25 call = $1.15 - $0.70 - $0.45Time value of March 27.50 put = $1.90 - $1.80 - $0.10
- For the Pfizer options:Premium for March 25 call = $0.70 + $0.45 + $1.15Premium for March 27.50 put = $1.80 + $0.10 - $1.90
- Varian, Inc. reported that “adjusted operating earnings decreased 6.0 percent to $25.9 million in the third quarter of fiscal year 2008. Adjusted operating profit margin was 10.6 percent for the
- As the economy approaches a recession, many analysts believe that companies use aggressive accounting techniques to prop up earnings. Such techniques include recognizing revenues before they are
- In 2014, Coca‐Cola’s equity multiplier was 3.04, calculated as total assets divided by stock-holder equity. The equity multiplier indicates the level of financial leverage a firm employs. In
- Combining these two factors, ROA and leverage, for Coca‐Cola produces the following: ROE = 7.71% x 3.04 =23.44%
- Lucent Technologies announced that earnings would be less than expected for a particular quarter, and at the same time it expressed doubt about earnings for the next fiscal year. Following the
- In late 2011, Green Mountain Coffee Roasters announced that its revenues increased 91 percent. The stock dropped almost 40 percent immediately. Why? The market’s expectation was for revenues to
- Apple Computer reported record first‐quarter earnings in a particular year. Apple earned 68 cents a share, up from 37 cents a share in the same period a year earlier. Nevertheless, its shares
- In early 2015, Coke was trading at $41. ◨ Based on TTM (trailing 12‐month) earnings, the P/E was 25.7 ◨ Based on expected earnings for 2016, the P/E was 19.3
- Assume that the beta for Intel is 1.10. Therefore, we know that Intel has slightly more systematic risk than the market as a whole. That is, on average, its stock price fluctuates more than average
- Assume the 10‐year Treasury bond yield to maturity (YTM) is 4.54 percent, compared to 4.39 percent a week earlier. The yield has increased 15 basis points in a week, or 0.15 percent. Calculate the
- According to the expectations theory, a five‐year bond will have the same expected return as a two‐year bond held to maturity plus a three‐year bond bought at the beginning of the third year.
- A zero‐coupon bond has 12 years to maturity and is selling for $300. Given the 24 semiannual periods, the power to be used in raising the ratio of $1,000/$300, or 3.3333, is 0.04167 (calculated as
- Assume a 15‐year, 6 percent bond is callable in 5 years at a price of $1,050. The bond currently sells for $1,075. The semiannual yield to call is calculated asI/YR, the semiannual yield to call,
- Assume an investor had $1,000 to invest three years ago. This investor purchased a 10 percent coupon bond with a three‐year maturity at face value. The promised YTM for this bond was 10
- Consider newly issued bond A with a three‐year maturity, a 10 percent coupon rate, and a required semiannual yield of 5 percent. Assuming semiannual interest payments of $50 for each of the next
- Table 17‐2 shows prices for a 10 percent coupon bond for market yields from 6 to 14 percent and for maturity dates from 1 to 30 years. For any given maturity, if we move from the 10 percent level,
- Table 17‐2 shows that for the 15‐year 10 percent coupon bond, the price would be $1,172.92 if market rates were to decline from 10 percent to 8 percent, resulting in a price appreciation of
- From Table 17‐2, we can see the effect that bond maturity has on the sensitivity of bond prices to interest rate changes. For example, for two 10 percent coupon bonds, if market yields drop from 10
- As we saw above, a 2‐percentage‐point drop in market yields from 10 percent to 8 percent increased the price of the 15‐year bond to $1,172.92, a 17.29 percent change, while the price of the
- As an illustration of the return and risk situation for an investor who is seeking steady returns, consider long‐term Treasury securities for the period 1926–2010. The securities have no
- From November 1, 2001, to April 1, 2002, the 10‐year T‐bond rate went from 4.2 percent to 5.4 percent, and the face value of these bonds went down more than 9 percent. Thus, in only five months,
- In 2014, Vanguard’s total international bond fund returned 8.82 percent versus only 5.89 percent for its total U.S. bond fund. However, its emerging market bond fund returned only 4.34 percent in
- The T. Rowe Price International Bond Fund provides U.S. investors with diversification away from U.S. markets. The fund invests heavily in government bonds from developed countries, although it also
- With $100,000 to invest, an investor could put approximately $20,000 in each of five bonds, with the first bond maturing two years from now, the second maturing three years from now, and so forth.
- The Vanguard Total Bond Market Index is one of the largest bond index funds. Its expense ratio is a mere 0.20 percent, which Vanguard states is on average 77 percent lower than other bond funds with
- A report from Fidelity’s Investment Grade Bond Fund made the following observation: “Yield curve positioning was a solid contributor to fund performance during the year while the yield curve
- The Fed started raising short‐term interest rates in June 2004 and raised them 14 times through early 2006. When the raises started, the 10‐year Treasury note yielded about 4.6 percent. In
- Assume that Carl is optimistic about Intel’s prospects. Carl instructs his broker to buy a March call option on Intel at a strike price of $40. Assume that the stock price is $41.15, and the
- Consider the credit spread, as reflected by the difference in rates between 10‐year Treasuries and corporate Baa bonds. In 2008, the spread widened to approximately 4 percent versus the average of
- Table 18‐1 shows the duration calculation for a 5 percent, five‐year bond. The bond is priced at $974.17 because interest rates have risen so that the current Yield to Maturity (YTM) is 5.6
- A writer (seller) of a Coca‐Cola six‐month put at $55 per share is obligated, under certain circumstances, to receive from the put holder 100 shares of Coke for which the writer will pay $55 per
- A Coca‐Cola six‐month call option at $55 per share gives the buyer the right (an option) to purchase 100 shares of Coke at $55 per share from a writer (seller) of the option anytime during the
- Using our same bond with a modified duration of 3.861, assume an instantaneous yield change of 20 basis points ( 0.0020), from 10 percent to 10.20 percent. The approximate change in price based on
- Using the duration of 4.054 years from Example 18‐12 and the YTM of 10 percent, the modified duration isExample 18‐12Consider a 10 percent coupon bond with a YTM of 10 percent and a five‐year
- Consider a 10 percent coupon bond with a YTM of 10 percent and a five‐year life. This bond has a duration of 4.054 years, approximately 1 year less than maturity. However, if the maturity of this
- Equity LEAPS are available on over 2,500 individual stocks including Intel and Adobe, and Index LEAPS are available on over 20 indexes including the S&P 100 and S&P 500.
- Assume that an investor buys a Microsoft three‐month call with an exercise price of $50. The payoff for the call at expiration is a function of the stock price at that time. For example, at
- Assume that a writer sells a March Intel put at an exercise price of $40 when the stock price is $41.15. The premium is $0.30, or $30 for 100 shares, which the buyer of the put pays and the seller
- Figure 19‐2 illustrates the profit situation for a call buyer. The stock price is assumed to be $48, and a six‐month call with an exercise price of $50 has a premium of $4. Up to the exercise
- Figure 19‐5 illustrates the profit–loss position for the seller of a put. Assume that a six‐month put is sold at an exercise price of $50 for a premium of $4. The seller of a naked put receives
- Assume that an investor purchased 100 shares of Hewlett‐Packard last year for $40 per share and this year, with the stock price at $48, writes a (covered) six‐month call with an exercise price of
- Assume in March an investor decides to sell 600 shares of Google stock at its current price of $550 but wants to delay the sale until the next tax year. To ensure the $550 selling price, the investor

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