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investments analysis and management

Questions and Answers of Investments Analysis And Management

For a typical investor with a wrap account, how much attention do you think he or she receives from the designated money manager?
Using your same brokerage account as in Problem 5‐1 (same margin rate and transaction costs), assume that you buy IBM at $156 a share, on 60 percent margin. During the year, IBM pays a dividend of
If the initial margin requirement is 50 percent on a $9,000 transaction (100 shares at $90 per share), an investor who wants to fully use the margin provision must contribute $4,500, borrowing
Assume that the maintenance margin is 30 percent, with a 50 percent initial margin, and that the price of the stock declines from $90 to $80 per share. Equation 5-3 is used to calculate actual
Why are investors interested in having margin accounts? What risk do such accounts involve?
Assume an initial margin requirement of 50 percent and a maintenance margin of 30 percent. An investor buys 100 shares of stock on margin at $60 per share. The price of the stock subsequently drops
Assume an initial margin requirement of 50 percent and a maintenance margin of 30 percent. An investor buys 100 shares of stock on margin at $60 per share. The price of the stock subsequently drops
A closing price of 101.375 on a particular day for an IBM bond represents 101.375 percent of $1,000, or 1.01375 × $1,000 = $1,013.75. Treasury bond prices are quoted in 32nds and may be shown as
An investor in the 28 percent marginal tax bracket who is offered a 5 percent municipal bond would have to receive 0.05 / (1 0.28) = 6.94% from a comparable taxable bond to be as well off.
In September 2011, with the European fiscal crisis regularly in the news, it was reported that Moody’s Investors Services was expected to cut the ratings of three large French banks because of
A few examples of rating agency miscues include the following events. In December 2001, Enron was rated investment grade on a Friday. On Sunday, it filed for bankruptcy. Also at that time, S&P rated
Citicorp, a major bank, has a large Visa operation. In the past, it regularly took the cash flows from the monthly payments that customers make on their Visa accounts, securitized them, and sold the
What does it mean to say that investors in Ginnie Maes face the risk of early redemption?
The Coca‐Cola Company reported $33.173 billion as total stockholders’ equity for fiscal year‐end 2013. This is the book value of Coca‐Cola’s equity. Based on average shares outstanding of
Coca‐Cola’s 2013 earnings were $2.08 per share, and it paid an annual dividend per share that year of $1.12. Assuming a price for Coca‐Cola of $41.31 (on December 31, 2013), the dividend yield
Is there any relationship between a savings bond and a U.S. Treasury bond?
Assume that the board of directors of Coca‐Cola meets on May 26 and declares a quarterly dividend, payable on July 2. May 26 is called the declaration date. The board will declare a
Assume an investor shorts 100 shares of Sandisk at $100 per share. The investor must have $5,000 in the account (initial margin of 50 percent). The proceeds of the short sale are left in the account,
What is the margin requirement for U.S. government securities?
The financial crisis that began in 2008 was not a crisis for everyone. For example, David Einhorn from Greenlight Capital made a fortune during the financial crisis. Einhorn shorted the investment
Explain the role of market makers on NASDAQ.
What is the difference between a day order and an open order?
What is the role of the SEC in the regulation of securities markets?
Is there any link between margin accounts and short selling?
How popular are short sales relative to all reported sales?
A bond purchased at par ($1,000) and held to maturity provides a yield in the form of a stream of cash flows or interest payments but no price change. A bond purchased for $800 and held to maturity
Using the above data, for 100 shares, $4,500 borrowed, and a maintenance margin of 30 percent, a margin call will be issued when the price is MC price $4,500 100(1-0.30) : $64.29
Assume an investor named Erica believes that the price of General Motors (GM) will decline over the next few months and wants to profit if her assessment is correct. She calls her broker with
Explain the difference between the following types of orders: sell limit, buy limit, buy stop, and sell stop.
Assume that we know the performance of the S&P 500 Index for the first five years of the second decade of the 21st century, defined as 2010–2019. What annual geometric mean must the market average
Calculation of arithmetic mean and geometric mean: Data for Extell Corp.The arithmetic mean of the total returns for Extell, 2008–2012: To calculate the geometric mean in this example, convert the
The difference in meaning of the arithmetic and geometric mean, holding Extell stock over the period January 1, 2008, through December 31, 2012, for two different investment strategies, is as
Calculate the return and the return relative for the following assets:a. A preferred stock bought for $70 per share, held one year during which $5 per share dividends are collected, and sold for
Using the five years of returns, assume that one of the five years during the second half of the decade, 2015–2019, shows a loss of 10 percent. What would the geometric mean of the remaining four
At the beginning of the year, a $500,000 portfolio was invested half in stocks and half in bonds. At the end of the year, the portfolio had yielded $19,000 in dividends and interest. However, because
How long must an asset be held to calculate a return?
Calculate the arithmetic and geometric mean return for the S&P 500 (Table 6‐1) for the years 2000–2002. How does this change when 2003 is included?Table 6‐1 TABLE 6-1 Historical Composite
The returns shown in Table 6‐1 are calculated as shown in Equation 6-2. For example, the return (R) for 2010 for the S&P 500 Index was 14.82 percent, calculated asTable 6‐1Equation 6-2 R2010
Calculate the index value for the S&P 500 (Table 6‐1) assuming a $1 investment at the beginning of 1980 and extending through the end of 1989. Using only these index values, calculate the
Using the returns for Extell for the years 2008– 2012, we can illustrate the deviation of the values from the mean. The numerator for the formula for the variance of these Yt values is Σ(Yt -
Let’s calculate cumulative wealth per $1 invested for the 1990s, one of the two greatest decades in the 20th century in which to own common stocks. This will provide you with a perspective on
The geometric mean for the return for the S&P 500 Index for the period 1926– 2010 was 9.57 percent. Assume that the geometric mean for the yield component of the total return on the S&P 500 for the
Assume that one of your relatives, on your behalf, invested $100,000 in a trust holding S&P 500 stocks at the beginning of 1926. Using the data in Table 6‐6, determine the value of this trust
Suppose you know that cumulative inflation for the period 1926–2010 was 12.34. You also know that the geometric mean for Treasury bills for this period was 3.6 percent. What was the real return for
By using the geometric mean annual return for a particular financial asset, the cumulative wealth index can be found by converting the return on a geometric mean basis into a return relative and
In a recent year, the Brazilian market was up about 150 percent, but the currency adjustment for U.S. investors was negative (83 percent), leaving a U.S. dollar return for the year of approximately
Knowing the geometric mean for inflation for some time period, we can add 1.0 and raise it to the nth power. We then divide the cumulative wealth index on a nominal basis by the ending value for
Based on some calculations you have done, you know that the cumulative wealth for corporate bonds for the period 2008–2012 was $1.234. However, you have misplaced the return for 2010. The other
Now assume that your relative had invested $100,000 in a trust holding “small stocks” at the beginning of 1926. Determine the value of this trust at the end of 2010.
Consider a U.S. investor who invests in WalMex at 40.25 pesos when the value of the peso stated in dollars is $0.10. One year later, WalMex is at 52.35 pesos, and the stock paid no dividend. The peso
Assume that we know that for the period 1926–2010 the yield component for common stocks was 3.99 percent and that the cumulative wealth index was $2,420.46. The cumulative wealth index value for
Based on data from Table 6‐1 for the 10 years of the 1990s ending in 1999, the arithmetic mean is calculated in Table 6‐3: Table 6‐1Table 6‐3 X=[-3.14 + 30.00++20.87]/10 = 187.63/10 = 0.1876
What if your relative had invested $100,000 in a trust holding long‐term Treasury bonds at the beginning of 1926. Determine the value of this trust at the end of 2010.
Let’s consider the impact of the falling dollar on U.S. investors for one year, 2007. Canadian stocks earned Canadian investors 10.5 percent, but the gain for U.S. investors was 28.4 percent
Finally, what if this relative had invested $100,000 in a trust holding Treasury bills at the beginning of 1926. Determine the value of this trust by the end of 2010.
Calculate cumulative wealth for corporate bonds for the period 1926–2010, using a geometric mean of 5.9 percent (85‐year period).
As an illustration of how the arithmetic mean can be misleading in describing returns over multiple periods, consider the data in Table 6‐4, which show the movements in price for two stocks over
Given a cumulative wealth index for Treasury bills of $20.21 for the period 1926–2010, calculate the geometric mean.
Suppose your father earned a salary of $35,000 in 1975, and by 2014, his salary had increased to $135,000. How much better off is he in terms of purchasing power? We can convert the $35,000 in 1975
Given an inflation rate of 3 percent over the period 1926–2010 (geometric mean annual average), calculate the inflation‐adjusted cumulative wealth index for corporate bonds as of year‐end 2010.
The return for the S&P 500 in 2014 was about 13.5 percent. The rate of inflation was about 1.5 percent. Therefore, the real (inflation‐adjusted) return for large U.S. common stocks in 2014 was
Given a geometric mean inflation rate of 3 percent, determine how long it would take to cut the purchasing power of money in half using the rule of 72.
Consider the period 1926–2014. The geometric mean for the S&P 500 for the entire period was approximately 10 percent and for the CPI, 3.0 percent. Therefore, the real (inflation‐ adjusted)
The standard deviation of the 10 annual returns from 2005 through 2014 for the S&P 500 can be calculated as shown in Table 6‐5.Table 6‐5 TABLE 6-5 Calculating the Standard Deviation for the
If a basket of consumer goods cost $1 at the beginning of 1926 and $12.34 at the end of 2010, calculate the geometric mean rate of inflation over this period.
Assume that over the period 1926–2010 the yield index component of common stocks had a geometric mean annual average of 3.99 percent. Calculate the cumulative wealth index for this component as of
Using the data from Table 6‐6, we can assess the relative accuracy of Equation 6-9 as follows:Table 6‐6Equation 6-9 (1.096) ≈ (1.115)² -(0.199)² 1.201≈ 1.244 -0.039 1.201≈ 1.204
Using the returns for the years 1926–1931 from Table 6‐1, determine the geometric mean for this period. Show how the same result can be obtained from the ending wealth index value for 1931 of
Assume that Treasury bonds continued to have a geometric mean as shown in Table 6‐6 until 100 years have elapsed. Calculate the cumulative ending wealth per $1 invested for this 100‐year period.
The ending wealth value of $2,420.46 for common stocks in Figure 6‐2 is the result of compounding at 9.6 percent for 85 years, orCWI = WI0 (1.096)85 = $1.00 (2,420.46) = $2,420.46 Figure 6‐2
The CWI for common stocks (S&P 500) for 1926–2010 (85 years) was $2,364.78, based on a geometric mean of 9.57 percent for that period. The average dividend yield for those 85 years was 3.99
Assume that over the period 1926–2010 the geometric mean rate of return for Treasury bonds was 5.4 percent. The corresponding number for the rate of inflation was 3 percent. Calculate, two
Using data for three periods, construct a set of returns that will produce a geometric mean equal to the arithmetic mean.
Common stocks have returned slightly less than twice the compound annual rate of return for corporate bonds. Does this mean that common stocks are about twice as risky as corporates?
Someone offers you a choice between $50,000 to be received 10 years from now, or a $20,000 portfolio of stocks guaranteed to earn a compound annual average rate of return of 10.4 percent per year for
Can cumulative wealth be stated on an inflation‐ adjusted basis?
Over the long run, stocks have returned a lot more than bonds, given the compounding effect. Why, then, do investors buy bonds?
Given the strong performance of stocks over the last 85 years, do you think it is possible for stocks to show a negative average return over a 10‐year period?
Suppose someone promises to double your money in 10 years. What rate of return are they implicitly promising you?
A technical analyst claimed in the popular press to have earned 25 percent a month for 10 years using his technical analysis technique. Is this claim feasible?
Which alternative would you prefer: (1) 1 percent a month, compounded monthly, or (2) 1/2 percent a month, compounded semimonthly (24 periods)?

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