Questions and Answers of Investments Analysis And Management

Assume that a large‐cap value manager earned an average active return relative to the Russell 1000 Value Index (the benchmark) of 2.2 percent. Furthermore, assume that the manager’s tracking risk
Explain how Jensen’s alpha is derived from the CAPM.
Consider a midcap stock fund whose manager emphasizes stocks that currently are out of favor with investors. The manager believes that recent events have caused these stocks to sell for less than
Why is Jensen’s alpha computationally efficient?
Consider a domestic large‐cap equity fund manager who gradually shifts more of the portfolio’s assets to international stocks. Furthermore, the manager tends to inadvertently focus on midcap
Explain why the steeper the angle, the better the performance in Figure 22‐1.Figure 22‐1 Rate of return 24 22 20 18 16 4 12 10 8 RF 5 W S&P 500- M 10 15 Standard deviation of
What role does statistical significance play in the Jensen measure?
In theory, what would be the proper market index to use?
Do the Sharpe and Jensen measures produce the same rankings of portfolio performance?
How do the Global Investment Performance Standards help investors?
What does the term “performance attribution” mean?
What does style analysis seek to accomplish?
Identify a major problem when using style analysis.
Paul Joubert retired from his firm. He has continued to hold his private retirement investments in a portfolio of common stocks and bonds. At the beginning of 2015, when he retired, his account was
What is the relationship between option prices and their intrinsic values? Why?
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
According to Table 6‐6, the standard deviation for all common stocks for the period 1926–2010 was 19.9 percent. Using data from Table 6‐1, calculate the standard deviation for the years
Fidelity’s Equity‐Income Fund has an expense ratio of approximately 0.66 percent, consisting of a management fee of 0.45 percent and other expenses of 0.21 percent. The Fund calculates that if
Consider the amount of retirement wealth that can be accumulated by one individual contributing $5,000 annually to a tax‐sheltered account if returns are compounded annually. Over many years of
A 2012 study of 401(k) retirement plan participants found that participants under age 30 had 33 percent of their assets in stocks, while people in their 30s and 40s had much larger allocations to
During 2011, investors became more risk‐averse as they reacted to a variety of events in both the United States and abroad. The European sovereign debt crisis (Greece, etc.) and banking crisis, and
The years 2000–2002 each showed negative returns for the major stock indexes, as did 2008. For large company stocks, those were the only negative return years since 1990. While investors expected
Investors have often sought out emerging markets as an investing opportunity on the basis that these economies may act differently from the industrialized economies, thereby providing some offset in
In terms of Figure 1-1, when would an investor expect to earn the risk‐free rate of return?Figure 1-1 return Expected RF Large firm common stocks Corporate bonds Risk Small
Individual investors can exploit a spin‐off (defined as a division of a company that is turned into a separate publicly held company), better than institutional investors in some cases. Some
“A risk‐averse investor will not assume risk.” Agree or disagree with this statement, and explain your reasoning.
Summarize the basic nature of the investment decision in one sentence.
Distinguish between expected return and realized return.
Rational investors always attempt to minimize their risks! Agree or disagree, and explain your reasoning.
Coca‐Cola is justifiably famous for its brand name and its global marketing efforts. Its success, however, is heavily dependent on what happens in the non‐U.S. markets it has increasingly
What is meant by “indirect” investing?
A 10‐year, 10 percent coupon bond has a dollar coupon of $100 (10 percent of $1,000); therefore, knowing the percentage coupon rate is the same as knowing the coupon payment in dollars.13 This bond
Using a spreadsheet, determine what a $1,000 investment in a CD would be worth after one year if the stated interest rate is 6 percent (stated on an annual basis) and the interest is compounded
A 5 percent stock dividend would entitle an owner of 100 shares of a particular stock to an additional five shares. A 2‐for‐1 stock split would double the number of shares of stock outstanding
The price of Coca‐Cola on December 31, 2013, was $41.31. The most recent 12‐month trailing earnings per share for the company at the time was $2.08. The trailing P/E ratio, therefore, was 19.9.
Petrobras, a large energy company in Brazil, has an ADR listed on the NYSE. On the other hand, Samsung, a major producer of consumer products, has no ADR traded in the United States. However, an
What is meant by the term securitization?
What is meant by home country bias?
With regard to bond ratings, which of the following statements is INCORRECT?a. The first four categories represent investment‐grade securities.b. Ratings reflect the absolute probability of
Preferred stocks and common stocks are similar in thata. Both are equity securitiesb. Both pay a stated and fixed dividendc. The expected return for each can be estimated with precision for the
The common stockholdera. Is guaranteed a specified dividend returnb. Is senior to (i.e., ranks above) debtholders in terms of paymentc. Takes relatively small risk in any given yeard. Can best be
Municipal bond yields are stated on an after‐tax basis, while corporate bond yields are stated on a before‐tax basis. Agree or disagree, and state your reasoning.
Fidelity Investments is one of the largest investment companies in the United States, offering hundreds of alternative funds to its investors. Fidelity Investments is the fund company, or sponsor, of
What is meant by “indirect” investing?
The following two ETFs reflect the variety of ETFs in existence. The Vanguard Total Stock Market ETF (VTI) seeks to provide long‐term growth of capital and income by investing in more than 3,000
A fund’s prospectus describes the fund’s objectives, policies, operations, and fees. The prospectus for Fidelity’s Equity‐Income Fund contains the following statement: “Equity‐Income is a
For the same two funds discussed in 3‐2, the ending wealth after five years was $1.4283 per dollar invested for the Equity‐Income Fund and $1.2940 per dollar invested for the Personal Strategy
An example of a stated fund objective is, “Equity‐Income seeks reasonable income by investing mainly in income‐producing equity securities. In selecting investments, the fund also considers the
In the late 1990s, growth funds had a big run. With the incredible performance of dot.coms and technology stocks, which are primarily growth stocks, value funds performed poorly relative to growth
As of December 31, 2014, the 10‐year annualized rate of return (geometric mean) for the Wall Street Emerging Growth Fund was 9.49 percent. Assume an investor invested $10,000 in this fund on
Assume that the Titan Fund has a portfolio of stocks valued on a given day at $50,000,000. Its liabilities are $500,000, and shareholders of this fund own five million shares. The NAV is NAV
How similar is an ETF to a closed‐end fund?
For the period ending July 2012, Vanguard’s Prime Money Market Fund Investor Shares earned 0.03 percent. What was the ending wealth given a $10,000 investment?
The John Hancock Bank and Thrift Opportunity Fund had an average discount of about 13.5 percent over a five‐year period. At one point, the fund sold for a discount of 18 percent, at which time an
What does it mean for an investment company to be regulated?
A $2,500 minimum is required to open an account in Fidelity’s Equity‐Income Fund (the minimum is only $500 for Fidelity retirement accounts). A minimum balance of $2,000 must be maintained.
Consider the three classes of shares for the MFS Massachusetts Investors Growth Stock Fund, A, B, and C. Each has a different combination of loads, fees, and total annual expenses as follows: Sales
American Funds is one of the largest mutual fund organizations. Rather than advertise extensively as does Fidelity and Vanguard, American sells funds through brokers at a maximum sales charge (load
The average annual total returns for the Titan Equity Fund and its corresponding market benchmark for several recent years were as follows: Therefore, investing $10,000 in the Titan Fund and
Fidelity’s Equity‐Income Fund is a no‐load fund, with no exchange fee for fund transfers within Fidelity’s fund family, and it has no 12b‐1 fee. The Vanguard Group operates a well‐ known
Janus Venture Fund, an equity fund with strong historical performance, had a return of −45 percent for the year 2000. However, it paid out $16.38 per share as a result of selling securities which
The State Street High Income Fund Class B shares have no up‐front sales charge. The fund had a return of 2.6 percent one year when the expense ratio was 2.17 percent. Therefore, before expenses the
Fidelity Investments offers access to a fund supermarket known as FundsNetwork. Hundreds of companies participate and provide access to over 10,000 funds.
How would an owner of shares of Fidelity’s Equity‐Income Fund “cash out?”
Research on IPOs identifies two major conclusions. First, IPO stocks generally skyrocket on their first day of trading, which suggests that they are underpriced at initial offering. Second, on
An analyst gathered the following data about stocks J, K, and L, which together form a value‐weighted index: The ending value‐weighted index (base index=100) is closest
Discuss the importance of the financial markets to the U.S. economy. Can primary markets exist without secondary markets?
From October 2012 to March 2013 an international index declined about 57 percent. It then advanced in 1 year about 69 percent. Determine by calculations if investors were ahead after the advance or
In 2008, in the midst of the financial crisis, the brokerage firm Merrill Lynch sold $6.6 billion of its own preferred shares through private placements to long‐term investors. This sale was
Discuss the functions of an investment banker.
Assume that you have a stock currently priced at $56 that moves exactly proportional to the S&P 500 Index. Over a six‐month period the index moves from 1,110 to 1,243.20. What should the price of
For the 20th century, the compound annual average return on the S&P 500 was 10.35%. How much would $1 have grown to over these 100 years?
In November 2011, Viacom announced it was moving from the New York Stock Exchange, after 40 years, to the NASDAQ Global Select Market. The opposite also occurs. In 2010, Charles Schwab, the large
Outline the process for a primary offering of securities involving investment bankers.
Assume that an international index is at 10,000. Some people are predicting that this index could lose 50% because of the economy’s difficulties. If that were to happen, what percentage rate of
Netflix, the DVD and streaming video company, enjoyed a stock price above $100 for many months. However, it tried to change its pricing policy and lost subscribers. In announcing 2011 third‐quarter
Outline the structure of equity markets in the United States. Distinguish between auction markets and negotiated markets.
The 52‐week low for the NASDAQ index occurred on 9/4/09 at 1982.05, while the 52‐week high occurred on 4/26/10 at 2,535.28. For the DJIA, the dates are the same, and the comparable numbers are
At the beginning of 2011, the S&P 500 Index had a value of 1282.62. At year‐end, the index value was 1300.58; thus, for 2011, the percent change was a meager 1.40%. Is this all that equity
In what way is an investment banker similar to a commission broker?
On March 18, 2000, the Dow gained approximately 500 points to close at 10,630.6. This was a percentage gain of 4.94 percent. In contrast, on October 21, 1987, the Dow gained 186.84 points to close at
Explain the role of the Designated Market Makers, the successors to specialists. Refer to the NYSE for information.
Since the NYSE features a fully automated auction, why do you think it also features a physical auction as well?
Is there any similarity between an NASDAQ market maker and a Designated Market Maker on an exchange?
Explain the difference between NASD and NASDAQ.
Explain what an ECN is.
What advantages do ECNs offer?
Why do you think the New York Stock Exchange in 2005 agreed to a merger with ArcaEx, a very different type of marketplace?
What is an OTC security? How are such securities traded?
In terms of how they are constructed, what are the two primary types of stock indexes currently being used in the United States?
What is meant by the term blue‐chip stocks? Cite three examples.
What is the EAFE Index?
Approximately how many stocks are listed on the NYSE? Does NASDAQ have more listed?
What is meant by in‐house trading? Who is likely to benefit from this activity?
a. Assume that you can buy U.S. Coal for $20 per share, either paying cash or buying on margin. The initial margin requirement is 50 percent, and the maintenance margin is 30 percent. U.S. Coal pays
What is meant by the statement, “The bond market is primarily an OTC market?”
Assume that Coca‐Cola and Visa, both of which are in the DJIA and in the S&P 500, have approximately equivalent market values (price multiplied by the number of shares outstanding) but very
ExxonMobil permits investors to buy up to $250,000 a year worth of Exxon stock from the company itself, with no commissions. Investors can open a direct‐purchase account with Exxon for as little as
You open a margin account at Chas Pigeon, a discount broker. You subsequently short Exciting.com at $286, believing it to be overpriced. This transaction is done on margin, which has an annual
In September 2014, the SEC filed charges against a roommate and a friend of a hedge fund analyst for insider trading ahead of an announcement that hedge fund Pershing Square Capital Management had

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