Questions and Answers of Investments Analysis And Management

Consider a stock currently selling at $40. We analyze two options with exercise prices that are $5 on either side of the stock price. Exercise Price $45 $40 $35 Stock Price = 40 In the money put At
Assume that on February 10, Pfizer closes at $25.70 and that a March call option with a strike price of 25 is available for a price of $1.15. This option is in the money because the stock price is
Assume that there is a Pfizer March put available on February 10 with a strike price of $27.50. The current market price of the stock is $25.70. The price of the put on that day is $1.90:Intrinsic
Consider the Pfizer March 25 call option, with the stock price at $25.70. An investor who owned the call and wanted to own the common would be better off to sell the option at $1.15 and purchase the
The following is an example of the use of the Black–Scholes option pricing formula: Solve for C. AssumeS = $40E = $45r = 0.10t = 0.5 (6 months)σ = 0.45 d₁ In(40/45) + [0.10+0.5(0.45)²10.5 0.45
In Example 19‐17, N(d1) was 0.4785; therefore, to hedge a 1,000 share portfolio, the investor should write 21 call options [(1/0.4785) 1,000 2,089.86 individual options or about 21 contracts]. A $1
Consider the information for the call given earlier. Since the Black–Scholes model uses continuous interest, the discount factor is expressed in continuous form. It is equal to ert or e0.10(0.5).
The CBOE has a nice tutorial on options for investors, starting with the basics and going to more advanced topics—see www.cboe.com. The International Securities Exchange (ISE) offers an options
Assume that an investor holds an S&P 100 Index option (OEX)—the S&P 100 index consists of 100 stocks (capitalization weighted) from a broad range of industries. The strike price is 580, and the
In early April, an investor expects the stock market to rise strongly over the next two to three months. This investor decides to purchase an S&P 100 index May 590 call, currently selling for 24, on
Assume that an investor has a portfolio of NYSE blue‐chip common stocks currently worth $60,000. It is early April, and the investor is concerned about a market decline over the next couple of
Suppose a manufacturer of class rings is gathering orders to fill for this school year and wishes to ensure a price for gold to be delivered six months from now, when the rings will actually be
According to its website, CME Group is the world’s leading derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually. The company offers individuals and
Assume that the initial margin is equal to 5 percent of the total value and an investor holds one contract in an account. If the price of the contract changes by 5 percent because the price of the
Table 20‐1 illustrates how accounts are marked to market daily. Consider an investor who buys a stock‐index futures contract on the DJJA using the CBOT® DJIASM futures contract. Assume that the
Assume in December a speculator buys two May wheat contracts at 624’0 ($6.24 per bushel). The margin requirement for each is $1,700, and the contract size is 5,000 bushels. Sometime later the
Let’s consider the euro/dollar (EUR/USD) futures. Assume a U.S. investor bought $270,000 of French notes in January because of their much higher yields relative to U.S. notes and plans to sell them
Assume that in November a speculator thinks interest rates will rise over the next two weeks and wishes to profit from this expectation. The investor can sell one December T‐bond futures contract
Assume that an investor with $850,000 to invest believes that the stock market will advance but has been unable to select the stocks he or she wishes to hold. The S&P 500 futures contract is at 1140.
Assume that an investor buys 10 SSF contracts on Microsoft at $50 and sells them two months later at $60. The profit on this position would be[$60 - $50] x 100 shares x 10 contracts = $10,000
Assume that an investor shorts 10 SSF contracts on Microsoft at $50 and buys them back at $57. The loss on this position would be[$50 - $57] x 100shares x 10contracts = -$7,000
At a 3 percent inflation rate, the purchasing power of a dollar is cut in half in less than 25 years. Therefore, someone retiring at age 60 who lives to approximately 85 and does not protect himself
In recent years, dividends have been taxed at 15 percent, the lowest tax rate on dividends in modern history. Furthermore, long‐term capital gains have been taxed at a maximum of 15 percent.
An investor with a 10 percent return would have an 8.5 percent after‐tax return with a longterm capital gain. The same return taxed at the top federal marginal tax rate of 35 percent would result
The cumulative gain on the S&P 500 for 1995 and 1996 was 69.2 percent, the best two‐year period in a generation and one of the best in the history of stock market returns (only four other
To appreciate the importance of the asset allocation decision, think of an investor with $10,000 to invest and a five‐year investment horizon at the beginning of 2010. If the investor, believing
Consider a 10 percent coupon bond with three years to maturity. The annual coupon is $100, which is paid $50 every six months, and the total number of semiannual periods is six. Assume that the bond
Given the following information: Standard deviation for stock X = 12 percent Standard deviation for stock Y = 20 percent Expected return for stock X = 16 percent Expected return for stock Y = 22
Given the information in Problem 8‐1, the risk (standard deviation) for a portfolio consisting of 50 percent invested in X and 50 percent invested in Y can be seen to be:a. 19 percentb. 16
Given the information in Problem 8‐1, assume now that the correlation coefficient between stocks X and Y is + 1.0. Choose the investment below that represents the minimum‐risk portfolio:a. 100
The market has an expected return of 11 percent, and the risk‐free rate is 5 percent. Pfizer has a beta of 0.9. What is the required rate of return for Pfizer?
The market has an expected return of 12 percent, and the risk‐free rate is 5 percent. Activalue Corp’s systematic risk is 80 percent that of the market as a whole. What is the required rate of
Electron Corporation’s returns are 50 percent more sensitive to market moves than the average stock. The market risk premium is 7 percent. The risk‐free rate is 5 percent. What is the required
Jay Technology is currently selling for $45 a share with an expected dividend in the coming year of $2 per share. If the expected growth rate in dividends is 9 percent, what is the required rate of
Johnson and Johnson Pharmaceuticals (J&J) is expected to earn $2 per share next year. J&J has a payout ratio of 40 percent. Earnings and dividends have been growing at a constant rate of 10 percent
Puckett Foundries is expected to pay a dividend of $0.60 next year, $1.10 the following year, and $1.25 each year thereafter. The required rate of return on this stock is 18 percent. How much should
Mansur Industries is currently paying a dividend of $1 per share, which is not expected to change in the future. The current price of this stock is $12. What is the expected rate of return on this
You expect a stock’s dividend to increase by a compound factor of 1.7835 over eight years (compound growth). The current price is $45. The expected dividend is $2.00. What is the expected return on
McMillan Company is not expected to pay a dividend for five years but is then expected to pay a $3 per‐share dividend and to maintain that dividend forever. If an investor has a 25 percent required
Batler Corp is currently selling for $50 and paying a $2 dividend. Dividends are expected to double in eight years. What is the expected rate of return for this stock?
Naidu Corporation makes advanced computer components. It currently pays no dividend, but it expects to begin paying $1 a share four years from now. The expected dividends in subsequent years are also
Go to www.morningstar.com and look at Morgan Stanley’s S&P 500 “A” shares ( symbol = SPIAX). Assuming you invest $10,000 in these shares, how much would your account be worth on the first day
Consider a portfolio manager whose portfolio has $5 billion in assets. If this manager could increase the return on the portfolio an additional two‐tenths of 1 percent, how much would that add to
Shao Electronics has total assets of $550 million and stockholder’s equity of $330 million. It has total debt of $220 million. ROA is 11.3 percent. What is the ROE for this company?
Brozik Corp. expects to earn $2.90 next year. It has a payout ratio of 40 percent. The expected growth for this stock is 8 percent per year indefinitely. The leverage factor for this company is 1.9.
Gritta Industries expects to earn $2.50 next year and pay $1.75 in dividends. The expected growth rate, g, is 7 percent and the required return is 12 percent. Determine the P/E ratio for this company.
The Porras Corporation has sales of $30,000,000, total assets of $44,000,000, stockholders’ equity of $21,500,000, book value per share of $15.46, and net income of $6,230,000. What is the EPS for
A 7 percent coupon bond has five years remaining to maturity. It is priced to yield 8 percent. What is its current price?
A 5‐year zero‐coupon bond with a face value of $1,000 is priced to yield 6.5 percent. What is the price of this bond today?
Consider a 4 percent coupon bond with 15 years to maturity. Determine the YTM that would result in a price of $300 for the bond.
Using Problem 17‐11, assume that 28 years remain to maturity. How would the YTM change? Does the current yield change?Problem 17‐11Texaco Oil’s 10 percent coupon bonds are selling at 109.375.
A seven‐year, 5 percent coupon bond is sold at par. However, soon after the bond is sold, the going rate for this bond is 5.01 percent. What is the new price of the bond?
The Saxena Corporation sells a zero‐coupon bond with a 7 percent YTM and a maturity of 20 years. Assume interest rates remain constant for four years. What will be the price of this bond in four
Consider a 6.5 percent bond with a maturity of 10 years. The price of this bond is $972.50. The Macaulay duration is 5.9 years. What is the modified duration for this bond?
Closing prices for SilTech and New Mines for the years 1999–2014 are shown below.a. Calculate the total returns for each stock for the years 2000–2014 to three decimal places. Note that the
A 5.8 percent, 15‐year bond is currently priced at $924.55. The required yield is 6.6 percent. The yield immediately changes to 6.7 percent. What is the new price of the bond?
You are trying to decide whether to buy Banguard’s Large Stock Equity Fund and/or its Treasury Bond Fund. You believe that next year involves several possible scenarios to which you have assigned
Assume that the annual price data below is for General Foods and a broad stock market index, covering the period 1999–2014. Calculate the beta for General Foods. Use the ESTLIN function or the
Calculate the characteristic line for EG&G by letting Y be the annual returns for EG&G and X be the returns for the S&P 500 Index. The summary statistics are as follows: n = 10; ΣΥ = 264.5; Στ
Cole Pharmaceuticals is currently paying a dividend of $2 per share, which is not expected to change. Investors require a rate of return of 20 percent to invest in a stock with the riskiness of Cole.
Baddour Legal Services is currently paying a dividend of $2 per share, which is expected to grow at a constant rate of 7 percent per year. Investors require a rate of return of 16 percent. Phil
Bibbins Software is currently selling for $60 per share and is expected to pay a dividend of $3. The expected growth rate in dividends is 8 percent for the foreseeable future. Calculate the expected
Grieb Electronics has been undergoing rapid growth for the last few years. The current dividend of $2 per share is expected to grow at the rapid rate of 20 percent a year for the next three years.
Confirm the expected portfolio variances in column 2.The correlation coefficient, ρ, is 0.15. Return (%) Standard deviation (%) Covariance EG&G 25 30 112.5 GF 23 25
Confirm the expected standard deviations in column 3. The correlation coefficient, ρ, is 0.15. Return (%) Standard deviation (%) Covariance EG&G 25 30 112.5 GF 23 25
On the basis of these data, determine the lowest risk portfolio.The correlation coefficient, ρ, is 0.15. Return (%) Standard deviation (%) Covariance EG&G 25 30 112.5 GF 23 25
Assume that the risk‐free rate is 7 percent, the estimated return on the market is 12 percent, and the standard deviation of the market’s expected return is 21 percent. Calculate the expected
In Problem 10‐1, assume that the growth rate for the first five years is 25 percent rather than 30 percent. How would you expect the value calculated in Problem 10‐1 to change? Confirm your
Shakoori Corp is expected to pay a dividend of $2.25, and the dividend is expected to grow at a constant rate of 6 percent. This stock is 25 percent more risky than the market as a whole. The
You can buy Anoruo Inc. today for $85. Over the next year, it is expected to pay a dividend of $2. You think the price one year from now will be $90.50. Based on this information, what is your
The following annual data are available for a stock market index. The 2015 values in italics are estimates.a. Calculate the 2015 values for those columns left blank.b. On the assumption that g =
Thiewes Corp has an expected dividend of $1.75, k 13 percent, and g 7 percent. Based on the constant‐growth model, what is the expected price of this stock at the end of four years?
PGJ is a large producer of food products. In 2015, the percentage breakdown of revenues and profits was as follows:International operations account for about 22 percent of sales and 17 percent of
Combining information from the S&P reports and some estimated data for 2016, the following calendar‐year data, on a per share basis, are provided:a. Calculate D/E, ROE and R% for 2013–2015. (Use
A technician supposedly bragged that he earned 25 percent a month for a 10‐year period using his charts. Assuming he started with a $1,000 investment, determine how much money he would have at the
You need $40,000 five years from now to pay off a balloon payment on your house. You buy 30 bonds at face value with five‐year maturities yielding 6.2 percent. Will you have enough to meet your
Your aunt wishes to accumulate $100,000 as part of her retirement, which will occur 15 years from now. She can buy 50 bonds at face value yielding 5.4 percent. These bonds have a maturity of nine
Calculate, using the Black–Scholes formula, the value of a call option given the following information:Interest rate = 7%Time to expiration = 90 daysStock price = $50Exercise price = $45
Determine the value of Ribex call options that are $2 out of the money and have an exercise price of $40, a time to expiration of 90 days, the interest rate is 10 percent, and the variance of return
Using the information in Problem 19‐6, decide intuitively whether the put or the call will sell at a higher price, and verify your answer.Problem 19‐6Determine the value of Ribex call options
Given the following, show that the characteristic line for this company is Ŷ = 5.055 + 0.7756X: ΣΧ ΣΧΥ x = 264.5; Σx = 4,660.31; ΣΥ =116.1; Στ’ = 6,217.13; XY = 4,042.23; SS, =
What do technicians assume about the adjustment of stock prices from one equilibrium position to another?
How many, and which, factors determine portfolio risk?
How many total terms (variances and covariances) would exist in the variance–covariance matrix for a portfolio of 30 securities? How many of these are variances, and how many covariances?
When, if ever, would a stock with a large risk (standard deviation) be desirable in building a portfolio?
Evaluate the following statement: As the number of securities held in a portfolio increases, the importance of each individual security’s risk decreases.
What are the inputs for a set of securities using the Markowitz model?
Evaluate this statement: For any two‐stock portfolio, a correlation coefficient of −1.0 guarantees a portfolio risk of zero.
Agree or disagree with this statement: The variance of a portfolio is the expected value of the squared deviations of the portfolio’s returns from its mean return.
Evaluate this statement: Portfolio risk is the key issue in portfolio theory. It is not a weighted average of individual security risks.
Agree or disagree with these statements: There are n2 terms in the variance–covariance matrix, where n is the number of securities. There are n(n − 1) total covariances for any set of n
Holding a large number of stocks ensures an optimal portfolio. Agree or disagree and explain your reasoning.
Given the large‐cap stock index and the government bond index data in the following table, calculate the expected mean return and standard deviation of return for a portfolio 75 percent invested in
Consider the following information for Exxon and Merck:Expected return for each stock is 15 percent.Standard deviation for each stock is 22 percent.Covariances with other securities vary. Everything
Consider a diagram of the efficient frontier. The vertical axis is __________. The horizontal axis is __________, as measured by the __________.
Why do rational investors seek efficient portfolios?
Using the Markowitz analysis, how does an investor select an optimal portfolio?
What does it mean to say that combining the efficient frontier with indifference curves matches possibilities with preferences?
When efficient frontiers are calculated using asset classes, what types of results are generally found?
As we add securities to a portfolio, what happens to the total risk of the portfolio?

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