Investment Management EXAM-1
Which of the following is an underwriting function?
risk bearing
Which is an example of a Style Index?
small-cap value mid-cap growth mid-cap value small-cap growth
Trading in the secondary markets for U.S. Government and municipal bonds
takes place over the counter by dealers who buy and sell on their own account.
Two factors that influence the nominal risk-free rate are
the relative ease or tightness in capital markets and the expected rate of inflation.
The weak form of the efficient market hypothesis contends that technical trading rules are of little value.
True
Calculate the HPY for the Portfolio:
Two HPY's add, divide by 2
Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25 percent. The amount in the account at the end of 20 years is
$105,039.84
The annual rates of return of Stock Z for the last four years are 0.10, 0.15, -0.05, and 0.20, respectively. Compute the standard deviation of the annual rate of return for Stock Z.
.0935
When the 50-day moving average crosses the 200-day moving average from ____ on ____ volume, this would be a ____ signal.
1) Below 2) High 3) Bullish
The stock of the Madison Travel Co. is selling for $29 a share. You put in a limit buy order at $25 for one month. During the month the stock price declines to $19, then jumps to $35. Ignoring commissions, what would have been your rate of return on this investment? 40% What would be your rate of return if you had put in a market order? 20.69% What if your limit order was at $17? Since the market ________1________ to $17 the limit order ________2______.
1) Did not decline 2) Has never been executed Limit order @ $25: When market declined to $19, your limit order was executed at $25 (buy), then the price went to $35. Rate of return = ($35 - $25)/$25 = 40.00%. Assuming market order @ $29: Buy at $29, price goes to $35. Rate of return = ($35 - $29)/$29 = 20.69%. Limit order @ $17: Since the market did not decline to $17 (lowest price was $19) the limit order has never been executed.
For an investor with a time horizon of 12 years and higher risk tolerance, an appropriate asset allocation strategy would be
100 Percent Stocks
Which of the following is TRUE of the various market index series?
A low correlation exists between the U.S. indexes and those of Japan.
Lauren has a margin account and deposits $40,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling at $25 per share. A) How many shares can Lauren purchase using the maximum allowable margin? 4000 Shares B) What is Lauren's profit (loss) if the price of Gentry's: stock rises to $40? $60,000 falls to $20? $-20,000 If the maintenance margin is 30 percent, to what price can Gentry Wine fall before Lauren will receive a margin call? $21.43
A) Since the margin is 40 percent and Lauren currently has $40,000 on deposit in her margin account, if Lauren uses the maximum allowable margin her $40,000 deposit must represent 40% of her total investment. Thus, $40,000 = 0.4x then x = $100,000. This sum represents $40,000 of her own funds (equity) and $60,000 of borrowed funds. Since the shares are priced at $25 each, Lauren can purchase $100,000 / $25 = 4,000 shares. B) Total Profit = Total Return - Total Investment If stock rises to $40/share, Lauren's total return is: 4,000 shares ×$40 = $160,000. Total profit = $160,000 - $100,000 = $60,000 If stock falls to $20/share, Lauren's total return is: 4,000 shares × $20 = $80,000. Total loss = $80,000 - $100,000 = -$20,000 C) Margin= (Market Value- Initial Loan Value)/ Market Value where Market Value = Price per share × Number of shares. Initial Loan Value=Total Investment - Initial Margin=$100,000 - $40,000=$60,000 Therefore, if maintenance margin is 30 percent: 0.30 = (4000 Shares * Price) - $60,000)/ (4000 Shares * Price) 0.30(4,000 × Price)=(4,000 × Price) - $60,000 1,200.0 × Price=(4,000 × Price) - $60,000 -2,800.0 × Price= -$60,000 -2,800.0 ×Price= -$60,000 Price=$21.43
According to Dow Theory, a major market
Advance does not go straight up, because some investors will take profits
Which of the following is NOT a technical trading rule category?
Anti-fundamental and anti-portfolio approaches
The correlations among the U.S. investment-grade-bond series were very high because all rates of return for investment-grade bonds over time are impacted by common macroeconomic variables.
True
D1 Price A: $15 B: $22 C: $54 D2 Price A: $10 B: $25 C: $59 D3 Price A: $14 B: $44 C: $50 D4 Price A: $13 B: $43 C: $27 D5 Price A: $11 B: $43 C: $25 D1 Shares: A: 480 B: 350 C: 270 D2 Shares: A: 480 B: 350 C: 270 D3 Shares: A: 480 B: 175a C: 270 D4 Shares: A: 480 B: 175 C: 540b D5 Shares: A: 480 B: 175 C: 540 Calculate a Standard& Poor's Index for days 1 through 5 using a beginning index value of 10. Do not round intermediate calculations. Round your answers to three decimal places. Day 1: 10 Day 2: 10 Day 3: 9.471 Day 4: 9.615 Day 5: 8.923
Base=($15 x 480) + ($22 x 350) + ($54 x 270) =$29,480 Day 1=($15 x 480) + ($22 x 350) + ($54 x 270) =$29,480 Index1=($29,480/$29,480) x 10 = 10.000 Day 2=($10 x 480) + ($25 x 350) + ($59 x 270)=$29,480 Index2=($29,480/$29,480) x 10 = 10.000 Day 3=($14 x 480) + ($44 x 175) + ($50 x 270) =$27,920 Index3=($27,920/$29,480) x 10 = 9.471 Day 4=($13 x 480) + ($43 x 175) + ($27 x 540) =$28,345 Index4=($28,345/$29,480) x 10 = 9.615 Day 5=($11 x 480) + ($43 x 175) + ($25 x 540)= $26,305 Index5=($26,305/$29,480) x 10 = 8.923
Advances and declines are associated with market
Breadth
The low correlations between the U.S. and Japan confirm the benefit of global diversification.
True
Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?
Current Income
The risk premium is a function of the volatility of operating earnings, sales volatility, and inflation.
False
D1 Price A: $12 B: $22 C: $54 D2 Price A: $11 B: $25 C: $60 D3 Price A: $15 B: $44 C: $58 D4 Price A: $14 B: $42 C: $29 D5 Price A: $12 B: $45 C: $29 D1 Shares: A: 460 B: 360 C: 270 D2 Shares: A: 460 B: 360 C: 270 D3 Shares: A: 460 B: 180a C: 270 D4 Shares: A: 460 B: 180 C: 540b D5 Shares: A: 460 B: 180 C: 540 Calculate a Dow Jones Industrial Average for days 1 through 5. Do not round intermediate calculations. Round your answers to three decimal places. Day 1: Day 2: Day 3: Day 4: Day 5:
Day 1) No splits ($12+ $22 + $54)/3= 29.333 Day 2) Before Split: ($11+ $25 + $60)/3 =32 After Split: ($11 + $50 + $60)/x =32 X=3.7813 (new divisor) Day 3) Before Split: ($15 + $44 + $58)/ 3.7813= 30.942 After Split: ($15 + $44 + $29)/Y= 30.942 Y= 2.8440 (new divisor) Day 4) No splits ($14 + $42 + $29)/ 2.8440 =29.887 Day 5) No Splits ($12 + $45+ $29)/ 2.8440 =30.239
When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for U.S. markets.
False
In tests of the semistrong-form EMH, it is not necessary to use risk-adjusted rates of return.
False
Technical analysis and the efficient market hypothesis have a consistent set of assumptions concerning stock market behavior.
False
Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in.
False
HPY=
HPR - 1
The over-the-counter market lists more stocks than the New York Stock Exchange and the American Stock Exchange combined.
True
Studies of correlations among monthly U.S. bond price index returns have found
Low correlations between investment grade bonds and high yield bonds
You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills: 3.70% Large-cap common stock: 12.00% Long-term corporate bonds: 5.35% Long-term government bonds: 4.75% Small-capitalization comm. stock: 12.65% The annual rate of inflation during this period was 2 percent. Compute the real rate of return on these investment alternatives. Do not round intermediate calculations. Round your answers to two decimal places. Real Rate of Return: U.S. Government T-bills: ________1________% Large-cap common stock: _______2_______% Long-term corporate bonds: _____3_______% Long-term government bonds: ____4_____% Small-capitalization comm. stock: ___5___%
If inflation is 2%, real rate of return: =(1 + return)/(1 + inflation rate) - 1 Real Rate of Return- U.S. Government T-bills: 1.0370/1.02 - 1 = 0.0167 or 1.67% Large-cap common stock: 1.1200/1.02 - 1 = 0.0980 or 9.80% Long-term corp. bonds: 1.0535/1.02 - 1 = 0.0328 or 3.28% Long-term gov. bonds: 1.0475/1.02 - 1 = 0.0270 or 2.70% Small-cap. comm. stock: 1.1265/1.02 - 1 = 0.1044 or 10.44%
To a technician that believed in the importance of volume, a bullish signal would occur when
Prices increase on heavy volume.
You are given the following information regarding prices for a sample of stocks. Stock Stock # of Shares: A) 3,700,000 B) 12,000,000 C) 26,000,000 Price (T): A) $72 B) $26 C) $22 Price (T+1): A) $88 B) $38 C) $27 Construct an equal-weighted index by assuming $1,000 is invested in each stock. What is the percentage change in wealth for this portfolio? 30.37% Compute the percentage of price change for each of the stocks. Stock A: 22.22% Stock B: 46.15% Stock C: 22.73% Compute the arithmetic mean of these percentage changes. 30.37% Compute the geometric mean of the percentage changes in Part b. 29.91%
Period T: Market Value Stock A: $72 # of shares: 13.89 Market Value: $1,000 Stock B: $26 # of shares: 38.46 Market Value: $1,000 Stock C: $22 # of shares: 45.45 Market Value: $1,000 Total Market Value= $3,000 Period T+1 Market Value Stock A: $88 # of shares: 13.89 Market Value= $88* 13.89 =$1,222.22 Stock B: $38 # of shares: 38.46 Market Value= $38* 38.46 =$1,461.54 Stock C: $27 # of shares: 45.45 Market Value= $27* 45.45 =$1,227.27 Total Market Value= $1,222.22 + $1,461.54 + $1,227.27 = $3,911.03 Percentage Change: ($3,911.03-$3,000)/$3,000 =30.37% B) Stock A: ($88-$72)/$72 = 22.22% Stock B: ($38-$26)/$26 = 46.15% Stock C: ($27-$22)/$22 = 22.73% Arithmetic Average: (.2222+.4615+.2273)/3= 30.37% C) Geometric average=[(1.2222)(1.4615)(1.2273)]^1/3)- 1 =.2991 or 29.91%
The first step in the investment process is the development of a(n)
Policy Statement
Index movements are influenced by differential prices of the components in a(n)
Price Weighted Index
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 K) Price: $19 Shares Outstanding: 105,000,000 M) Price: $76 Shares Outstanding: 2,400,000 R) Price: $39 Shares Outstanding: 28,000,000 DECEMBER 31, Year 2 K) Price: $35 Shares Outstanding: 105,000,000 M) Price: $44 Shares Outstanding: 4,800,000a R) Price: $44 Shares Outstanding: 28,000,000 Compute the beginning and ending values for a price-weighted index and a market-value-weighted index. Assume a base value of 100 and Year 1 as the base period. Do not round intermediate calculations. Round your answers to two decimal places. PWIYear 1: PWIYear 2: VWIYear 1: VWIYear 2: Compute the percentage change in the value of each index during the year. Do not round intermediate calculations. Round your answers to two decimal places. Percentage change in PWI: % Percentage change in VWI: % Compute the percentage change for an unweighted index assuming $1,000 is invested in each stock. Do not round intermediate calculations. Round your answer to two decimal places. %
Price-weighted index (PWI)Year 1 = (19 + 76 + 39)/3 = 44.67 To account for stock split, a new divisor must be calculated:(19 + 38 + 39)/X=44.67X=2.149 (new divisor after stock split) Price-weighted index Year 2 = (35 + 44 + 44)/2.149 = 57.23 Market value Year 1 =$19(105,000,000) + $76(2,400,000) + $39(28,000,000)= $3,269,400,000 assuming a base value of 100 and Year 1 as base period, then ($3,269,400,000/$3,269,400,000) x 100 = 100.00 Market value Year 2 =$35(105,000,000) + $44(4,800,000) + $44(28,000,000)= $5,118,200,000 assuming a base value of 100 and Year 1 as base period, then ($5,118,200,000/$3,269,400,000) x 100 = 156.55 Percentage change in PWI = (57.23 - 44.67)/44.67 = 28.13% Percentage change in VWI = (156.55 - 100.00)/100.00 = 56.55% C) Period December 31, year 1: Market Value Stock K: $19 # of shares: 52.63 Market Value: $1,000 Stock M: $76 # of shares: 13.16 Market Value: $1,000 Stock R: $39 # of shares: 25.64 Market Value: $1,000 Total Market Value= $3,000 Period December 31, year 2: Market Value Stock K: $35 # of shares: 52.63 Market Value: $35 * 52.63 =$1,842.11 Stock M: $44 # of shares: 26.32* Market Value: $44 * 26.32 =$1,157.89 Stock R: $44 # of shares: 25.64 Market Value: $44 * 25.64 =$1,128.21 Total Market Value= $1,842.11 + $1,157.89 + $1,128.21 = $4,128.21 Percentage Change: ($4,128.21-$3,000)/$3,000 =37.61%
The random walk hypothesis contends that stock prices occur randomly.
True
Suppose you buy a round lot of Francesca Industries stock (100 shares) on 50 percent margin when the stock is selling at $35 a share. The broker charges a 12 percent annual interest rate, and commissions are 2 percent of the stock value on the purchase and sale. A year later you receive a $0.30 per share dividend and sell the stock for $47 a share. What is your rate of return on Francesca Industries?
Profit = Ending Value - Beginning Value + Dividends - Transaction Costs - Interest Beginning Value of Investment = $35 × 100 shares = $3,500 Your Investment= margin requirement= 0.50 × $3,500=$1,750 Ending Value of Investment =$47 × 100 shares= $4,700 Dividends = $0.30 × 100 shares = $30 Transaction Costs= (0.02 × $3,500) + (0.02 × $4,700) =$70 + $94=$164 Interest = 0.12 × (0.50 × $3,500) = $210 Therefore: Profit= $4,700 - $3,500 + $30 - $164 - $210=$856 The rate of return on your investment of $1,750 is: $856 / $1,750 = 48.91%
An example of a value weighted stock market indicator series is the
S & P 500 Index
An efficient market requires a large number of profit-maximizing investors.
True
An increase in debit balances in brokerage accounts is viewed by technicians as a bullish sign.
True
Because technicians are suspicious of financial statements, they consider it advantageous not to depend on them.
True
Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.
True
Results of initial public offering (IPOs) studies tend to support the semi-strong EMH because it appears that prices adjusted rapidly after initial underpricing.
True
The T-Bill-Eurodollar yield spread widens during periods of international crisis.
True
Which of the following statements is FALSE?
Unrealized capital gains are taxable.
Which of the following is NOT an advantage of technical analysis identified by technicians?
a. The majority of investors cannot consistently process new information correctly. b. The majority of investors cannot process new information quickly enough. c. Fundamental analysis depends heavily on financial accounting statements. d. Fundamental analysis may not time the investment properly when trading under- or over-valued securities.
A portfolio manager without superior analytical skills should
a. minimize transaction costs. b. determine and quantify the risk preferences of a client. c. ensure that the portfolio is completely diversified. d. maintain the specified risk level.
All of the following are major sources of uncertainty EXCEPT
default risk
Studies of the relationship between P/E ratios and stock returns have found that
low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks.
Measures of risk for an investment include
variance of returns and coefficient of variation of returns.
An individual in the 15 percent tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns 8 percent annually before taxes and inflation is 2.5 percent per year, what is the real value of the investment in 20 years?
$28,467
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.Refer to Exhibit 3.2. If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call?
$33.33
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.Refer to Exhibit 3.2. What is Heidi's profit if RC's price rises to $80?
$60,000
An individual in the 36 percent tax bracket invests $5,000 in a tax-exempt IRA. If the investment earns 10% annually, what will be the value of the IRA after five years?
$8053
Stock A) Shares: 15 Price (t): 10 Price (t+1): 12 Calculate the HPY:
($12 / $10) - 1 = 20%
Assume you bought 100 shares of NewTech common stock on January 15, 2003 at $50.00 per share and sold it on January 15, 2004 for $40.00 per share. What was your holding period return?
25%
What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax rate of 31 percent
4.14%
What would the equivalent taxable yield be on an investment that offers a 6 percent tax exempt yield? Assume a marginal tax rate of 28 percent.
8.33%
The following information is available concerning the historical risk and return relationships in the U.S. capital markets: U.S. CAPITAL MARKETS TOTAL ANNUAL RETURNS, 1990-2015 Common Stock: Arithmetic Mean: 10.4% Geometric Mean: 9.2% Standard Deviation of Return: 18.3% Treasury Bills: Arithmetic Mean: 3.36% Geometric Mean: 3.33% Standard Deviation of Return: 2.3% Long-Term Government Bonds: Arithmetic Mean: 4.8% Geometric Mean: 4.56% Standard Deviation of Return: 5.8% Long Term Corporate Bonds: Arithmetic Mean: 6.05% Geometric Mean: 5.78% Standard Deviation of Return: 9.2% Real Estate: Arithmetic Mean: 8.69% Geometric Mean: 8.63% Standard Deviation of Return: 5% A) Explain why the geometric and arithmetic mean returns are not equal and whether one or the other may be more useful for investment decision making. The arithmetic average assumes the __________1__________ , while the geometric average assumes ____________2___________. B) For the time period indicated, rank these investments on a relative basis using the coefficient of variation from most to least desirable. Rank Investment) Сoefficient of variation 1) Real Estate 57.54% 2) Treasury Bills 68.45% 3) Long Term Gov. B. 120.83% 4) Long Term Corp. B 152.07% 5) Common Stocks 173.62% Assume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding treasury bills. Do not round intermediate calculations. Round your answers to two decimal places. Use a minus sign to enter negative values, if any. Arithmetic: from -1.15% to 7.87%
A) 1) presence of simple interest 2) assumes compounding or interest on interest B) Ranking is best accomplished by using the coefficient of variation (standard deviation / arithmetic mean. Rank #1: should have the lowest coefficient of Variation, then Rank #2 should be the second least and so on C) Expected mean plus or minus two standard deviations: Arithmetic: 3.36% - (2.3%(1.96) = -1.15% 3.36% + (2.3%(1.96) = 7.87% From: -1.15% to 7.87%
You have $42,000 to invest in Sophie Shoes, a stock selling for $70 a share. The initial margin requirement is 70 percent. Ignoring taxes and commissions, calculate your rates of return if the stock rises to $80 a share and if it declines to $35 a share assuming you pay cash for the stock. Rate of return if the stock rises to $80 a share: 14.29% Rate of return if the stock declines to $35 a share: -50% Ignoring taxes and commissions, calculate your rates of return if the stock rises to $80 a share and if it declines to $35 a share assuming you buy it using maximum leverage. Rate of return if the stock rises to $80 a share: 20.41% Rate of return if the stock declines to $35 a share: -71.43%
Assume you pay cash for the stock: A) Number of shares you could purchase = $42,000/$70 = 600 shares. If the stock is later sold at $80 a share, the total shares proceeds would be $80 × 600 shares = $48,000. Therefore, the rate of return from investing in the stock is as follows: (48,000-42000)/42000= 14.29% If stock is later sold at $35 a share, the total shares proceeds would be $35 × 600 shares = $21,000. Therefore, the rate of return from investing in the stock would be: (21,000-42,000)/42,0000= -50.00% B) Assuming you use the maximum amount of leverage in buying the stock, the leverage factor for a 70 percent margin requirement is: = 1/percentage margin requirement = 1/0.70. Thus, the rate of return on the stock if it is later sold at $80 a share = 14.29% × 1/0.70 = 20.41%. In contrast, the rate of return on the stock if it is sold for $35 a share = -50.00% × 1/0.70 = -71.43%.
You are considering acquiring shares of common stock in the Madison Beer Corporation. Your rate of return expectations are as follows: MADISON BEER CORP.Possible Rate of Return Probability -0.250 .30 -0.100 .200 .050 .200 .250 .30 Compute the expected return [E(Ri)] on your investment in Madison Beer. Round your answer to one decimal place.
E(RMBC)=(-0.25)(0.30) + (-0.10)(0.20) + (0.05)(0.20) + (0.25)(0.30) =-0.010 or -1.0%
The financial market landscape has become a few large holding companies that own global exchanges for stocks, bonds, and derivatives.
False
The geometric mean of a series of returns is always larger than the arithmetic mean, and the difference increases with the volatility of the series.
False
The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage.
False
The primary market is where issues are traded between current and potential owners.
False
The spending phase occurs when investors are relatively young.
False
The typical investor's goals rarely change during his/her lifetime.
False
Two measures of the risk premium are the standard deviation and the variance.
False
Unlike the Dow Jones Industrial Average, the Nikkei-Dow Jones Average is price weighted.
False
On August 15, you purchased 90 shares of stock in the Cara Cotton Company at $30 a share and a year later you sold it for $25 a share. During the year, you received dividends of $3.70 a share. Compute your HPR and HPY on your investment in Cara Cotton. Use a minus sign to enter negative values, if any. Round your answer for HPR to three decimal places. Round your answer for HPY to one decimal place.
HPR: (25 + 3.70)/30=.957 HPY= .957-1= -.043= -4.3%
On February 1, you bought 100 shares of stock in the Francesca Corporation for $45 a share and a year later you sold it for $51 a share. During the year, you received a cash dividend of $1.40 a share. Compute your HPR and HPY on this Francesca stock investment. Round your answer for HPR to three decimal places. Round your answer for HPY to one decimal place.
HPR: 1.164 51+40/45= HPY: 16.4% HPY=HPR-1 1.164-1=.164=16.4%
The Dow Jones Industrial Average has been criticized for being blue-chip biased.
True
The gifting phase is similar to, and may be concurrent with, the spending phase.
True
The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.
True
The two most common calculations investors use to measure return performance are arithmetic means and geometric means.
True
A pure auction market is one in which
buyers and sellers submit bid and ask prices to a central location to be matched.
Which of the following is NOT a characteristic of a good market for goods and services? a. liquidity b. low transaction costs c. timely and accurate information d. external efficiency e. All of these choices are correct
e. All of these choices are correct
Adding foreign stocks and bonds to a U.S. portfolio will almost certainly _____the risk of the portfolio and can possibly _____ its average return.
reduce; increase
Adding Japanese, Australian, and Italian stocks to a U.S. stock portfolio _____ the portfolio risk because the global portfolio reflects only worldwide _____.
reduces; systematic factors
The member of the New York Stock Exchange who acts as a dealer on assigned stocks is known as a
registered trader.
Only the stocks of large companies are traded in the primary market.
False
The Dow Jones Industrial Average is a value weighted average.
False
The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
False
The arithmetic mean is a superior measure of the long-term performance because it indicates the compound annual rate of return based on the ending value of the investment versus its beginning value.
False
The coefficient of variation is the expected return divided by the standard deviation of the expected return.
False
The expected return is the average of all possible returns.
False
A good secondary market is important to the efficiency of the primary market.
True
A price-weighted index such as the DJIA is a geometric mean of current stock prices.
True
An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.
True
Asset allocation is the process of dividing funds into different classes of assets.
True
Average tax rate is defined as total tax payment divided by total income.
True
Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.
True
Experts suggest life insurance coverage should be seven to ten times an individual's annual salary.
True
In a continuous market, trades occur at any time the market is open and stocks are priced either by auction or by dealers
True
Long-term, high-priority goals include some form of financial independence.
True
Margin transaction involves borrowing part of the cost of an investment.
True
Rule 144A reduced registration documentation requirements for placing securities privately with large institutional investors.
True
Five years ago, you bought 300 shares of Kayleigh Milk Co. for $40 a share with a margin of 65 percent. Currently, the Kayleigh stock is selling for $65 a share. Assume there are no dividends and ignore commissions. Assuming that you pay cash for the stock, compute the annualized rate of return on this investment if you had paid cash. 10.2% Assuming that you used the maximum leverage in buying the stock, compute your rate of return with the margin purchase. 96.15%
A) Assuming that you pay cash for the stock: Rate of Return= ($65 * 300) - ($40 * 300)/ ($40*300) = 62.50% This is the return earned over 5 years so the annualized returns is: (1 + 0.6250)1/5 - 1 = 10.20% B) Assuming that you used the maximum leverage in buying the stock, the leverage factor for a 65 percent margin requirement is = 1/percentage margin requirement = 1/0.65 = 1.54. Thus, the rate of return on the stock if it is later sold at $65 a share = 62.50% × 1.54 = 96.15%. The annualized return is (1 + 0.9615)1/5 - 1 = 14.42%
You are given the following information regarding prices for a sample of stocks. Stock # of Shares: A) 1,900,000 B) 12,000,000 C) 26,000,000 Price (T): A) $76 B) $30 C) $17 Price (T+1): A) $88 B) $40 C) $24 Construct a price-weighted index for these three stocks, and compute the percentage change in the index for the period from T to T + 1. % Construct a value-weighted index for these three stocks, and compute the percentage change in the index for the period from T to T + 1. . %
A) Given a three security series and a price change from period T to T+1, the percentage change in the series would be 23.58 percent. Period T: A) $76 B) $30 C) $17 Sum: $123 Divisor: 3 Average: $41 Period T+1: A) $88 B) $40 C) $24 Sum: $152 Divisor: 3 Average: $50.67 Percentage Change: $50.67- $41.00)/$41 = 23.58% B) Stock Market Value: A) $76 * 1,900,000= $144,400,000 B) $30 * 12,000,000= $360,000,000 C) $17 * 26,000,000= $442,000,000 Total Market Value= $144,400,000+$360,000,000+$442,000,000= $1,271,200,000 Percentage Change= ($1,271,200,000- $946,400,000)/ $946,400,000 = 34.32%
Compute the real rates of return for the following situations assuming that the inflation rate is 4 percent. Compute the real rates of return if the rate of inflation was 9 percent. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to one decimal places. A) On February 1, you bought 140 shares of stock in the Francesca Corporation for $39 a share and a year later you sold it for $45 a share. During the year, you received a cash dividend of $2.00 a share. Real rate of return at 4%: 15.9% Real rate of return at 9%: 10.6% B) On August 15, you purchased 80 shares of stock in the Cara Cotton Company at $38 a share and a year later you sold it for $33 a share. During the year, you received dividends of $2.80 a share. Real rate of return at 4%: -9.4% Real rate of return at 9%: -13.6% C) At the beginning of last year, you invested $4,500 in 90 shares of the Chang Corporation. During the year, Chang paid dividends of $7.00 per share. At the end of the year, you sold the 90 shares for $58 a share. Real rate of return at 4%: 25% Real rate of return at 9%: 19.3%
A) Real Rate of Return= (Holding Period Return/ 1+Rate of inflation) -1 HPR= (45+2)/39 =1.205 Real Rate of Return at 4%: (1.205/1+.04)-1 = 15.9% Real Rate of Return at 9%: (1.205/1+.09)-1 = 10.6% HPR= (33+2.80)/38 = .942 B) Real Rate of Return at 4%: (.942/1+.04)-1= -9.4% Real Rate of Return at 9%: (.942/1+.09)-1= -13.6% HPR: (58 + 7)/50 =1.3 C) Real Rate of Return at 4%: (1.3./1+.04)-1= 25% Real Rate of Return at 9%: (1.3/1+.09)-1= %19.3
The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.
Benchmark
A properly selected sample for use in constructing a market indicator series will consider the sample's source, size, and
Breadth
HPR=
Ending Value of Investment (# of shares * (selling price + dividend) / Beginning Value of Investment (# of shares * Stock Price)
A bond market index is easier to create than a stock market index because the universe of bonds is much broader than that of stocks.
False
A corporation wishing to raise funds will normally want the investment banker to use a "best efforts" arrangement rather than a negotiated basis.
False
An equally weighted indicator series is also known as an unweighted indicator series.
False
An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee.
False
Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
False
If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity.
False
In constructing the portfolio, the manager should maximize the investor's risk level.
False
Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.
False
It is easier to construct an indicator series for bonds because of their relatively stable returns pattern.
False
It is not a good idea to get too specific when constructing your policy statement.
False
It is required by law that a stock market must have a physical location.
False
Nominal rates are averages of all possible real rates.
False
At the beginning of last year, you invested $2,750 in 50 shares of the Chang Corporation. During the year, Chang paid dividends of $3 per share. At the end of the year, you sold the 50 shares for $62 a share. Compute your total HPY on these shares and indicate how much was due to the price change and how much was due to the dividend income. Do not round intermediate calculations. Round your answers to one decimal place. HPY (Total): % HPY (Price Increase Alone): % HPY (Dividends): %
HPY (total): 18.2% HPR=((62*50)+(3*50))/ 2750 = 1.182 HPY=1.182-1 =.182 = 18.2% HPY (price increase alone: 12.7% (62*50)/2750= 1.127 HPY= 1.127-1= .127 =12.7% HPY (Dividends): 5.5% HPY (total)= HPY (price increase) + HPY(dividend) .182=.127+ HPY(Div) .055 =HPY Dividend
Individual security selection is far more important than the asset allocation decision.
Individual security selection is far more important than the asset allocation decision.
You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of $55. Your broker tells you that your margin requirement is 65 percent and that the commission on the purchase is $180. While you are short the stock, Charlotte pays a $2.15 per share dividend. At the end of one year, you buy 100 shares of Charlotte at $44 to close out your position and are charged a commission of $175 and 10 percent interest on the money borrowed. What is your rate of return on the investment? Do not round intermediate calculations. Round your answer to two decimal places.
Profit on a Short Sale = Beginning Value - Ending Value - Dividends - Transaction Costs - Interest Beginning Value of Investment: = $55 × 100 shares = $5,500(sold under a short sale arrangement) Your Investment=margin requirement: 0.65 × $5,500= $3,575 Ending Value of Investment = $44 × 100 shares = $4,400 (Cost of closing out position) Dividends = $2.15 × 100 shares = $215 Transaction Costs = $180 + $175 = $355 Interest = 0.10 × (0.35 × $5,500) = $192.50 Therefore, Profit= $5,500 - $4,400 - $215 - $355 - $192.50=$337.50 The rate of return on your investment of $3,575 is:$337.50 / $3,575 = 9.44%
During the past year, you had a portfolio that contained U.S. government T-bills, long-term government bonds, and common stocks. The rates of return on each of them were as follows: U.S. government T-Bills- 3.2% U.S. government long-term bonds- 6.10% U.S. common stocks- 9.10% A) During the year, the consumer price index, which measures the rate of inflation, went from 100 to 110 (1982 - 1984 = 100). Compute the rate of inflation during this year. Round your answer to one decimal place. % B) Compute the real rates of return on each of the investments in your portfolio based on the inflation rate. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places. Real rate of return U.S. government T-bills: % U.S. government long-term bonds: % U.S. common stocks: %
Rate of Inflation where CPI = The Consumer Price Index Rate of Inflation= (110-100)/100 =0.100 or 10.0% Real Rate of Return= (HPR/1+ inflation)-1 U.S. government T-bills=(1.032/1.100)-1= -0.0618 or -6.18% U.S. government long-term bonds= (1.061/1.100)-1= -0.0355 or -3.55% U.S. common stocks=(1.091/1.100)-1 =-0.0082 or -0.82%
A continuous market that has price continuity requires depth of buyers and sellers.
True
A) Someone in the 36 percent tax bracket can earn 7 percent annually on her investments in a tax-exempt IRA account. What will be the real value of a one-time $13,000 investment in 5 years? 10 years? 20 years? Assume that the rate of inflation during all these periods was 3 percent a year. You may use Appendix C to answer the questions. Do not round intermediate calculations. Round your answers to the nearest dollar. in 5 years: $ in 10 years: $ in 20 years: $ B) Someone in the 15 percent tax bracket can earn 10 percent annually on his investments in a tax-exempt IRA account. What will be the real value of a one-time $13,000 investment in 5 years? 10 years? 20 years? Assume that the rate of inflation during all these periods was 3 percent a year. You may use Appendix C to answer the questions. Do not round intermediate calculations. Round your answers to the nearest dollar. in 5 years: $ in 10 years: $ in 20 years: $
With inflation growing at 3% annually, the below calculations need to be deflated by the following factors: in 5 years: (1.03)5 = 1.1593 in 10 years: (1.03)10 = 1.3439 in 20 years: (1.03)20 = 1.8061 a. $13,000 invested in 7 percent tax-exempt IRA (assuming annual compounding) in 5 years: $13,000(FVIF @ 7%) = $13,000(1.4026) = $18,233 in 10 years: $13,000(FVIF @ 7%) = $13,000(1.9672) = $25,573 in 20 years: $13,000(FVIF @ 7%) = $13,000(3.8697) = $50,306 The real values are: in 5 years: $18,233/1.1593 = $15,728 in 10 years: $25,573/1.3439 = $19,029 in 20 years: $50,306/1.8061 = $27,853 b. $13,000 invested in 10 percent tax-exempt IRA (assuming annual compounding) in 5 years: $13,000(FVIF @ 10%) = $13,000(1.6105) = $20,937 in 10 years: $13,000(FVIF @ 10%) = $13,000(2.5937) = $33,719 in 20 years: $13,000(FVIF @ 10%) = $13,000(6.7275) = $87,457 The real values are: in 5 years: $20,937/1.1593 = $18,060 in 10 years: $33,719/1.3439 = $25,090 in 20 years: $87,457/1.8061 = $48,423
You own 500 shares of Shamrock Enterprises that you bought at $26 a share. The stock is now selling for $46 a share. You put in a stop loss order at $41. If the stock eventually declines in price to $31 a share, what would be your rate of return with and without the stop loss order? Rate of return with the stop loss: 57.69% Rate of return without the stop loss: 19.23%
With the stop loss: ($41 - $26)/$26 = 57.69% Without the stop loss: ($31 - $26)/$26 = 19.23%
A) Someone in the 36 percent tax bracket can earn 8 percent annually on her investments in a tax-exempt IRA account. What will be the value of a one-time $19,000 investment in 5 years? 10 years? 20 years? You may use Appendix C to answer the questions. Do not round intermediate calculations. Round your answers to the nearest dollar. in 5 years: $27,917 in 10 years: $41,019 in 20 years: $88,559 B) Suppose the preceding 8 percent return is taxable rather than tax-deferred and the taxes are paid annually. What will be the after-tax value of her $19,000 investment after 5, 10, and 20 years? Do not round intermediate calculations. Round your answers to the nearest dollar. in 5 years: $24,388 in 10 years: $31,304 in 20 years: $51,578
a. $19,000 invested in 8 percent tax-exempt IRA (assuming annual compounding) in 5 years: $19,000(FVIF @ 8%) = $19,000(1.4693) = $27,917 in 10 years: $19,000(FVIF @ 8%) = $19,000(2.1589) = $41,020 in 20 years: $19,000(FVIF @ 8%) = $19,000(4.6610) = $88,558 b. After-tax yield=Before-tax yield(1 - Tax rate) =8%(1 - 0.36)=5.12% $19,000 invested at 5.12 percent (assuming annual compounding) in 5 years: $19,000(FVIF @ 5.12%) = $24,388 in 10 years: $19,000(FVIF @ 5.12%) = $31,305 in 20 years: $19,000(FVIF @ 5.12%) = $51,578
One of the reasons for constructing a policy statement is it
helps the investor decide on realistic investment goals
