Investments Final

A stock with a current market price of $40.20 has an associated call option priced at $7.30 and a strike price of $35.00. This call has an intrinsic value of ______ and a time value of _____

$5.20; $2.10 HW 7

You are considering purchasing a put option on a stock with a current price of $36. The exercise price is $39, and the price of the corresponding call option is $3.15. According to the put-call parity theorem, if the risk-free rate of interest is 6% and there are 90 days until expiration, the value of the put should be ____________.

$5.59 HW 7

The standard deviation of return on investment A is 13%, while the standard deviation of return on investment B is 8%. If the correlation coefficient between the returns on A and B is −0.096, the covariance of returns on A and B is _________.

-0.0010 HW 3

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

-6.44% HW 3

A portfolio with a 25% standard deviation generated a return of 13% last year when T-bills were paying 5.0%. This portfolio had a Sharpe ratio of ____.

.32 HW 3

The standard deviation of return on investment A is 23%, while the standard deviation of return on investment B is 18%. If the covariance of returns on A and B is 0.008, the correlation coefficient between the returns on A and B is _________.

0.193 HW 3

The expected return of a portfolio is 9.0%, and the risk-free rate is 4%. If the portfolio standard deviation is 13%, what is the reward-to-variability ratio of the portfolio?

0.38 HW 3

Asset A has an expected return of 15% and a standard deviation of 20%. The risk-free rate is 5%. What is the reward-to-variability ratio?

0.50 HW 3

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 22%, while stock B has a standard deviation of return of 28%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.046, the correlation coefficient between the returns on A and B is _________.

0.542 HW 3

A portfolio with a 25% standard deviation generated a return of 19% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.

0.58 Mock Exam 1 Version 2

A stock has a correlation with the market of 0.51. The standard deviation of the market is 27%, and the standard deviation of the stock is 35%. What is the stock's beta?

0.66 HW 3

The current stock price of Johnson & Johnson is $80, and the stock does not pay dividends. The instantaneous risk-free rate of return is 7%. The instantaneous standard deviation of J&J's stock is 40%. You want to purchase a put option on this stock with an exercise price of $71 and an expiration date 45 days from now. Using Black-Scholes, the put option should be worth ______ today.

1.04 HW 7

As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period.

10% HW 2

You put up $50 at the beginning of the year for an investment. The value of the investment grows 5% and you earn a dividend of $3.00. Your HPR was ____.

11.0% HW 3

Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

12.9% HW 4

Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

12.9% Mock Exam 2

An investment earns 13% the first year, earns 20% the second year, and loses 15% the third year. The total compound return over the 3 years was ______.

15.26% HW 3

What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 16%?

16% HW 4

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

16.25% HW 4

The arithmetic average of -23%, 39%, and 44% is ________.

20.00% HW 3

Todd Mountain Development Corporation is expected to pay a dividend of $2 in the upcoming year. Dividends are expected to grow at the rate of 7% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 18%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

25.00 HW 6

The geometric average of −17%, 55%, and 60% is _________.

27.21% HW 3

Consider the CAPM. The risk-free rate is 8%, and the expected return on the market is 19%. What is the expected return on a stock with a beta of 1.8?

27.8% HW 4

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

3.92% HW 3

More than ______ of all trading is believed to be initiated by computer algorithms.

50% HW 2

The current stock price of Alcoa is $60, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's stock is 25%. You want to purchase a put option on this stock with an exercise price of $65 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk.

84 HW 7

Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A;B HW 4

Which of the following correctly describes a repurchase agreement?

Answer: The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. HW 1

The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________.

Archipelago; instinet HW 2

What is the lowest grade a bond can receive and still be considered investment grade?

BBB HW 5

A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

Call Option HW 1

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

Coupon rate HW 5

Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 42%. The T-bill rate is 6%. Your client chooses to invest 85% of a portfolio in your fund and 15% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? b. Suppose your risky portfolio includes the following investments in the given proportions: What are the investment proportions of your client's overall portfolio, including the position in T-bills? c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio?

Exam 1

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). b. What will be the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).

Exam 1

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. Calculate the first-period rates of return on the following indexes of the three stocks: a. A market value-weighted index b. An equally weighted index

Exam 1

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $22.00 per share. On March 1, a dividend of $2.00 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15.50 per share. You paid 40 cents per share in commissions for each transaction. a. What is the proceeds from the short sale (net of commission)? b. What is the dividend payment? c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $15.50 per share? d. What is the net gain from your transaction?

Exam 1

Suppose your expectations regarding the stock market are as follows: Use above equations to compute the mean and standard deviation of the HPR on stocks

Exam 1

Indigo Ink Supply recently paid a dividend of $2.09 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 15.10 on Indigo Ink Supply's stock: a. What will be the dividend paid out for the next six years? b. What is its intrinsic value today?

Exam 2

Jand, Inc., currently pays a dividend of $1.48, which is expected to grow indefinitely at 6%. If the current value of Jand's shares based on the constant-growth dividend discount model is $39.16, what is the required rate of return?

Exam 2

Plastic Pretzels stock recently paid a dividend of $1.31 per share. The dividend growth rate is expected to be 6.60% indefinitely. Stockholders require a return of 12.20% on this stock. a. What is the current intrinsic value of Plastic Pretzels stock? b. What would you expect the price of this stock to be in one year if its current price is equal to its intrinsic value? c. If you were to buy Plastic Pretzels stock now and sell it after receiving the dividend one year from now, what would be your holding period return (HPR)? d. If you are able to purchase the stock for $24.00 instead of its intrinsic value today, what would be the holding period return?

Exam 2

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3% and IR 7%. A stock with a beta of 1 on IP and 0.8 on IR currently is expected to provide a rate of return of 16%. If industrial production actually grows by 4%, while the inflation rate turns out to be 10%, what is your best guess for the rate of return on the stock?

Exam 2

What must be the beta of a portfolio with E(rP) = 15.75%, if rf = 6% and E(rM) = 11%?

Exam 2

You have invested in a Treasury Inflation Protected Security (TIPS) that has a par value of $1,000 and a coupon rate of 2.81%. You paid par value for the security, and it matures in two years. Assume that the inflation rate for next year is 2.55% and for the year after is 1.49%. Complete the following table by calculating the par values, the coupon payments, the principal repayment, the total payments, and the nominal and real rates of return for the next two years.

Exam 2

The risk that can be diversified away is __________.

Firm-specific risk HW 3

Published data on past returns earned by mutual funds are required to be ______.

Geometric returns HW 3

Published data on past returns earned by mutual funds are required to be ______.

Geometric returns Mock Exam 1 Version 1

A T-bill with face value $10,000 and 85 days to maturity is selling at a bank discount ask yield of 3.2%. a. What is the price of the bill? b. What is its bond equivalent yield?

HW 1

A T-bill with face value $10,000 and 95 days to maturity is selling at a bank discount ask yield of 4.2%. a. What is the price of the bill b. What is its bond equivalent yield?

HW 1

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. Calculate the first-period rates of return on the following indexes of the three stocks: a. A market value-weighted index b. An equally weighted index

HW 1

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). b. What will be the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).

HW 1

Find the after-tax return to a corporation that buys a share of preferred stock at $46, sells it at year-end at $46, and receives a $4 year-end dividend. The firm is in the 30% tax bracket

HW 1

Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 3.60%.

HW 1

Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 3.90%

HW 1

Look at the futures listings for corn in Figure 2.11. Suppose you buy one contract for December 2017 delivery at the closing price. If the contract closes in December at a price of $4.02 per bushel, what will be your profit or loss? (Each contract calls for delivery of 5,000 bushels.)

HW 1

Look at the futures listings for corn in Figure 2.11. Suppose you buy one contract for September 2017 delivery at the closing price. If the contract closes in September at a price of $3.9 per bushel, what will be your profit or loss? (Each contract calls for delivery of 5,000 bushels.)

HW 1

Refer to the stock options on Apple in the Figure 2.10. Suppose you buy an June expiration call option on 100 shares with the excise price of $145. a-1. If the stock price in June is $148, will you exercise your call? a-2. What is the net profit/loss on your position? a-3. What is the rate of return on your position b-1. Would you exercise the call if you had bought the June call with the exercise price $140? b-2. What is the net profit/loss on your position? b-3. What is the rate of return on your position? c-1. What if you had bought an June put with exercise price $145 instead? Would you exercise the put at a stock price of $145? c-2. What is the rate of return on your position?

HW 1

Refer to the stock options on Apple in the Figure 2.10. Suppose you buy an June expiration call option on 20 shares with the excise price of $135. a-1. If the stock price in June is $152, will you exercise your call? a-2. What is the net profit/loss on your position? a-3. What is the rate of return on your position? b-1. Would you exercise the call if you had bought the June call with the exercise price $145? b-2. What is the net profit/loss on your position? b-3. What is the rate of return on your position? c-1. What if you had bought an June put with exercise price $135 instead? Would you exercise the put at a stock price of $135? c-2. What is the rate of return on your position?

HW 1

ByLine, Inc. just sold 900,000 shares in a public offering for an offering price of $28 per share. The underwriting fee was 8.50% of the issue's total value based on the offering price. As soon as the shares were issued, the price jumped to $40 per share. What are the explicit, implicit, and total costs of the issue?

HW 2

DRK, Inc., has just sold 170,000 shares in an initial public offering. The underwriter's explicit fees were $102,000. The offering price for the shares was $48, but immediately upon issue, the share price jumped to $54.50. a. What is the total cost to DRK of the equity issue? b. Is the entire cost of the underwriting a source of profit to the underwriters?

HW 2

Dée Trader opens a brokerage account and purchases 100 shares of Internet Dreams at $56 per share. She borrows $3,500 from her broker to help pay for the purchase. The interest rate on the loan is 9%. a. What is the margin in Dée's account when she first purchases the stock? b. If the share price falls to $46 per share by the end of the year, what is the remaining margin in her account? c. If the maintenance margin requirement is 30%, will she receive a margin call? d. What is the rate of return on her investment?

HW 2

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $22.50 per share. On March 1, a dividend of $1.40 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $17.50 per share. You paid 55 cents per share in commissions for each transaction. a. What is the proceeds from the short sale (net of commission)? b. What is the dividend payment? c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $17.50 per share? d. What is the net gain from your transaction?

HW 2

Suppose that you just purchased 250 shares of Talk&Tell stock for $70 per share. a. If the initial margin requirement is 76.50%, how much money must you borrow? b. Construct the balance sheet that corresponds to the transaction.

HW 2

Suppose that you just short sold 100 shares of Quiet Minds stock for $85.00 per share. a. If the initial margin requirement is 65%, how much equity must you invest? b. Construct the balance sheet that corresponds to the transaction. c. Now suppose the price of the stock falls to $77 per share. What is your current margin percentage? d. The maintenance margin is 40%. What is the lowest price that will trigger a margin call?

HW 2

The Arizona Stock Exchange lists a bid price of 1.21 and an ask price of 1.40 for Kicking Bird Energy Corporation. a. At what price can you buy the stock? b. What is the dealer's bid-ask spread?

HW 2

The table below shows the limit order book for Foghorn Enterprises. a. If you place a market order to buy 1,050 shares, in what sequence will you pay for the shares? b. What is the total cost of the purchase?

HW 2

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 33%. The T-bill rate is 7% A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 30%. a. What is the investment proportion, y? b. What is the expected rate of return on the overall portfolio?

HW 3

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 43%. The T-bill rate is 4%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? b. Suppose your risky portfolio includes the following investments in the given proportions: What are the investment proportions of your client's overall portfolio, including the position in T-bills? c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio?

HW 3

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $195,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? c. Now suppose you require a risk premium of 11%. What is the price you will be willing to pay now?

HW 3

If the real interest rate is 4.40% per year and the expected inflation rate is 1.60%, what is the nominal interest rate according to the Fisher equation?

HW 3

Suppose your expectations regarding the stock market are as follows: Use above equations to compute the mean and standard deviation of the HPR on stocks.

HW 3

The stock of Business Adventures sells for $30 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.

HW 3

Using Table 5.3 as your guide, what is your estimate of the expected annual HPR on the market index stock portfolio if the current risk-free interest rate is 4.5%?

HW 3

XYZ stock price and dividend history are as follows: An investor buys four shares of XYZ at the beginning of 2015, buys another three shares at the beginning of 2016, sells one share at the beginning of 2017, and sells all six remaining shares at the beginning of 2018. a. What are the arithmetic and geometric average time-weighted rates of return for the investor? b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2015, to January 1, 2018. b-2. What is the dollar-weighted rate of return? (Hint: If your calculator cannot calculate internal rate of return, you will have to use a spreadsheet or trial and error.)

HW 3

You earned a nominal rate of return equal to 11.10% on your investments last year. The annual inflation rate was 2.90%. a. What was your approximate real rate of return? b. What was your exact real rate of return?

HW 3

You manage an equity fund with an expected risk premium of 12.6% and a standard deviation of 40%. The rate on Treasury bills is 6.4%. Your client chooses to invest $75,000 of her portfolio in your equity fund and $75,000 in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio for the equity fund?

HW 3

You manage an equity fund with an expected risk premium of 13.8% and a standard deviation of 52%. The rate on Treasury bills is 3.6%. Your client chooses to invest $120,000 of her portfolio in your equity fund and $30,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client's portfolio?

HW 3

A stock has an expected return of 6%. What is its beta? Assume the risk-free rate is 5% and the expected rate of return on the market is 10%

HW 4

Assume both portfolios A and B are well diversified, that E(rA) = 14.8% and E(rB) = 15.8%. If the economy has only one factor, and βA = 1 while βB = 1.1, what must be the risk-free rate?

HW 4

Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 35%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.1%, and one-half have an alpha of -4.1%. The analyst then buys $1.5 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.5 million of an equally weighted portfolio of the negative-alpha stocks. a. What is the expected return (in dollars), and what is the standard deviation of the analyst's profit? b-1. How does your answer for standard deviation change if the analyst examines 50 stocks instead of 20? b-2. How does your answer for standard deviation change if the analyst examines 100 stocks instead of 20?

HW 4

Here are data on two companies. The T-bill rate is 5.0% and the market risk premium is 6.2%. What would be the fair return for each company, according to the capital asset pricing model (CAPM)?

HW 4

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta of 1 on IP and 0.9 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 5%, while the inflation rate turns out to be 9%, what is your best guess for the rate of return on the stock?

HW 4

What must be the beta of a portfolio with E(rP) = 19.00%, if rf = 5% and E(rM) = 15%?

HW 4

A 13-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $930. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What are the stated and expected yields to maturity of the bonds? The bond makes its coupon payments annually.

HW 5

A 30-year maturity, 7.8% coupon bond paying coupons semiannually is callable in five years at a call price of $1,160. The bond currently sells at a yield to maturity of 6.8% (3.40% per half-year). a. What is the yield to call? b. What is the yield to call if the call price is only $1,110? c. What is the yield to call if the call price is $1,160 but the bond can be called in two years instead of five years?

HW 5

A bond has a par value of $1,000, a time to maturity of 20 years, and a coupon rate of 7.50% with interest paid annually. If the current market price is $750, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged?

HW 5

A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 7.9% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life.

HW 5

A two-year bond with par value $1,000 making annual coupon payments of $106 is priced at $1,000. a. What is the yield to maturity of the bond? b. What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8.6%, (b) 10.6%, (c) 12.6%?

HW 5

A zero-coupon bond with face value $1,000 and maturity of six years sells for $748.22. a. What is its yield to maturity? b. What will the yield to maturity be if the price falls to $732?

HW 5

Consider a bond paying a coupon rate of 8.25% per year semiannually when the market interest rate is only 3.3% per half-year. The bond has two years until maturity. a. Find the bond's price today and six months from now after the next coupon is paid. b. What is the total rate of return on the bond?

HW 5

The yield to maturity on one-year zero-coupon bonds is 7%. The yield to maturity on two-year zero-coupon bonds is 8%. a. What is the forward rate of interest for the second year? b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in (b)?

HW 5

You buy a five-year bond that has a 3.75% current yield and a 3.75% coupon (paid annually). In one year, promised yields to maturity have risen to 4.75%. What is your holding-period return?

HW 5

You have invested in a Treasury Inflation Protected Security (TIPS) that has a par value of $1,000 and a coupon rate of 2.94%. You paid par value for the security, and it matures in two years. Assume that the inflation rate for next year is 3.00% and for the year after is 1.76%. Complete the following table by calculating the par values, the coupon payments, the principal repayment, the total payments, and the nominal and real rates of return for the next two years.

HW 5

A common stock pays an annual dividend per share of $4.40. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $4.40, what is the value of the stock?

HW 6

A firm has current assets that could be sold for their book value of $24 million. The book value of its fixed assets is $62 million, but they could be sold for $92 million today. The firm has total debt with a book value of $42 million, but interest rate declines have caused the market value of the debt to increase to $52 million. What is this firm's market-to-book ratio?

HW 6

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 5% thereafter. If the required return for Deployment Specialists is 8.0%, what is the intrinsic value of its stock?

HW 6

Indigo Ink Supply paid a dividend of $4.5 last year on its common stock. It is expected that this dividend will grow at a rate of 8% for the next five years. After that, the company will settle into a slower growth pattern and plans to pay dividends that will grow at a rate of 3.6% per year. Investors require a return of 11% on the stock. a. What will be the dividend paid out for the next six years? b. What is the intrinsic value of Indigo's stock?

HW 6

Jand, Inc., currently pays a dividend of $1.44, which is expected to grow indefinitely at 5%. If the current value of Jand's shares based on the constant-growth dividend discount model is $37.66, what is the required rate of return?

HW 6

Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.12 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 15.40 on Jumbo's stock: a. What will be the dividend paid out for the next six years? b. What is its intrinsic value today?

HW 6

Lotsa Lenses paid a dividend of $1.29 last year, and plans a dividend growth rate of 2.50% indefinitely. Lotsa's stock price is now $13.19. What return can Lotsa Lenses' investors expect on their stock?

HW 6

Plastic Pretzels stock recently paid a dividend of $1.15 per share. The dividend growth rate is expected to be 4.20% indefinitely. Stockholders require a return of 11.00% on this stock. a. What is the current intrinsic value of Plastic Pretzels stock? b. What would you expect the price of this stock to be in one year if its current price is equal to its intrinsic value? c. If you were to buy Plastic Pretzels stock now and sell it after receiving the dividend one year from now, what would be your holding period return (HPR)? d. If you are able to purchase the stock for $20.40 instead of its intrinsic value today, what would be the holding period return?

HW 6

The risk-free rate of return is 5%, the required rate of return on the market is 10%, and High-Flyer stock has a beta coefficient of 1.1. If the dividend per share expected during the coming year, D1, is $2.60 and g = 4%, at what price should a share sell?

HW 6

A call option with a strike price of $78 on a stock selling at $97 costs $21.5. What are the call option's intrinsic and time values?

HW 7

An investor buys a call at a price of $5.70 with an exercise price of $52. At what stock price will the investor break even on the purchase of the call

HW 7

An investor purchases a stock for $43 and a put for $0.75 with a strike price of $40. The investor sells a call for $0.75 with a strike price of $50. What is the maximum profit and loss for this position?

HW 7

Imagine that you are holding 5,500 shares of stock, currently selling at $50 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $55 are selling at $2, and January puts with a strike price of $45 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $41, $50, $61? What will the value of your portfolio be if you simply continued to hold the shares?

HW 7

Refer to Figure 15.1, which lists the prices of various Microsoft options. Use the data in the figure to calculate the payoff and the profit/loss for investments in each of the following June 2017 expiration options on a single share, assuming that the stock price on the expiration date is $78.

HW 7

The following price quotations are for exchange-listed options on Primo Corporation common stock. With transaction costs ignored, how much would a buyer have to pay for one call option contract. Assume each contract is for 100 shares.

HW 7

Use the Black-Scholes formula to find the value of a call option based on the following inputs.

HW 7

You buy a share of stock, write a one-year call option with X = $27, and buy a one-year put option with X = $27. Your net outlay to establish the entire portfolio is $25.60. What must be the risk-free interest rate? The stock pays no dividends.

HW 7

You establish a straddle on Walmart using September call and put options with a strike price of $97. The call premium is $7.85 and the put premium is $8.60. a. What is the most you can lose on this position? b. What will be your profit or loss if Walmart is selling for $98 in September? c. At what stock prices will you break even on the straddle?

HW 7

You observe a premium of $38.00 for a call option on Birdwell Enterprises common stock, which is currently selling for $38. The strike price on the call option is $35. The option has four months to maturity. The stock pays no dividends. The current risk-free interest rate is 4.50%. What is the implied volatility of the stock?

HW 7

You purchase one Microsoft June 70 put contract for a premium of $.24. What is your maximum possible profit?

HW 7

Sinking funds are commonly viewed as protecting the _______ of the bond.

Holder HW 5

Regulation NMS: I. Supports the goal of integrating financial markets II. Requires the use of specialists to execute trades III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

I and III only

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.

I and III only HW 3

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size

I and III only HW 4

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III HW 1

Trading on inside information is: I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC

I, II, and III HW 2

Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported.

I, II, and III HW 2

Trading on inside information is: I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC

I, II, and III Mock Exam 1 Version 1

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III Mock Exam 1 Version 1

Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV HW 3

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV HW 3

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk

II only HW 4

A bond's price volatility _________ at _________ rate as maturity increases.

Increases; a decreasing HW 5

The dollar-weighted return is the _________.

Internal rate of return HW 3

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks HW 1

The yield on tax-exempt bonds is ______.

Less than the yield on taxable bonds HW 1

What was the result of high-frequency traders' leaving the market during the flash crash of 2010?

Market liquidity decreased HW 2

Beta is a measure of security responsiveness to _________.

Market risk HW 3

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 33%. The T-bill rate is 7% A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 30%. a. What is the investment proportion, y? b. What is the expected rate of return on the overall portfolio?

Mock Exam 1 Version 1

Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $20 per share. She borrows $2,500 from her broker to help pay for the purchase. The interest rate on the loan is 7%. a. What is the margin in Dée's account when she first purchases the stock? b. If the share price falls to $10 per share by the end of the year, what is the remaining margin in her account? c. If the maintenance margin requirement is 30%, will she receive a margin call? d. What is the rate of return on her investment?

Mock Exam 1 Version 1

Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 4.70%.

Mock Exam 1 Version 1

Refer to the stock options on Apple in the Figure 2.10. Suppose you buy an May expiration call option on 100 shares with the excise price of $135. a-1. If the stock price in May is $151, will you exercise your call? a-2. What is the net profit/loss on your position? a-3. What is the rate of return on your position? b-1. Would you exercise the call if you had bought the May call with the exercise price $135? b-2. What is the net profit/loss on your position? b-3. What is the rate of return on your position? c-1. What if you had bought an May put with exercise price $135 instead? Would you exercise the put at a stock price of $135? c-2. What is the rate of return on your position?

Mock Exam 1 Version 1

Suppose that you just purchased 250 shares of Talk&Tell stock for $70 per share. a. If the initial margin requirement is 76.50%, how much money must you borrow? b. Construct the balance sheet that corresponds to the transaction

Mock Exam 1 Version 1

The table below shows the limit order book for Foghorn Enterprises. a. If you place a market order to buy 1,150 shares, in what sequence will you pay for the shares? b. What is the total cost of the purchase?

Mock Exam 1 Version 1

You manage an equity fund with an expected risk premium of 13.8% and a standard deviation of 52%. The rate on Treasury bills is 3.6%. Your client chooses to invest $120,000 of her portfolio in your equity fund and $30,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client's portfolio?

Mock Exam 1 Version 1

A T-bill with face value $10,000 and 93 days to maturity is selling at a bank discount ask yield of 4.0%. a. What is the price of the bill? b. What is its bond equivalent yield?

Mock Exam 1 Version 2

Assume that you manage a risky portfolio with an expected rate of return of 16% and a standard deviation of 32%. The T-bill rate is 5%. Your client chooses to invest 80% of a portfolio in your fund and 20% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? b. Suppose your risky portfolio includes the following investments in the given proportions: What are the investment proportions of your client's overall portfolio, including the position in T-bills? c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio?

Mock Exam 1 Version 2

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). b. What will be the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).

Mock Exam 1 Version 2

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. Calculate the first-period rates of return on the following indexes of the three stocks: a. A market value-weighted index b. An equally weighted index

Mock Exam 1 Version 2

Suppose that you just purchased 200 shares of Talk&Tell stock for $60 per share. a. If the initial margin requirement is 71.00%, how much money must you borrow? b. Construct the balance sheet that corresponds to the transaction.

Mock Exam 1 Version 2

The table below shows the limit order book for Foghorn Enterprises. a. If you place a market order to buy 1,200 shares, in what sequence will you pay for the shares? b. What is the total cost of the purchase?

Mock Exam 1 Version 2

A firm has current assets that could be sold for their book value of $16 million. The book value of its fixed assets is $55 million, but they could be sold for $85 million today. The firm has total debt with a book value of $35 million, but interest rate declines have caused the market value of the debt to increase to $45 million. What is this firm's market-to-book ratio?

Mock Exam 2

A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 7.4% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life.

Mock Exam 2

A stock has an expected return of 8%. What is its beta? Assume the risk-free rate is 4% and the expected rate of return on the market is 20%.

Mock Exam 2

A zero-coupon bond with face value $1,000 and maturity of four years sells for $747.22. a. What is its yield to maturity? b. What will the yield to maturity be if the price falls to $731?

Mock Exam 2

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 6% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic value of its stock?

Mock Exam 2

Jand, Inc., currently pays a dividend of $1.48, which is expected to grow indefinitely at 6%. If the current value of Jand's shares based on the constant-growth dividend discount model is $39.16, what is the required rate of return

Mock Exam 2

Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.18 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 16.00 on Jumbo's stock: a. What will be the dividend paid out for the next six years? b. What is its intrinsic value today?

Mock Exam 2

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 6% and IR 5%. A stock with a beta of 1 on IP and 0.8 on IR currently is expected to provide a rate of return of 11%. If industrial production actually grows by 7%, while the inflation rate turns out to be 8%, what is your best guess for the rate of return on the stock?

Mock Exam 2

You buy a seven-year bond that has a 5.25% current yield and a 5.25% coupon (paid annually). In one year, promised yields to maturity have risen to 6.25%. What is your holding-period return?

Mock Exam 2

Which one of the following is not an example of a brokered market?

NASDAQ HW 2

The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

NASDAQ; NYSE Exam 1

Diversification is most effective when security returns are _________.

Negatively correlated HW 3

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

Put Option HW 1

Market risk is also called __________ and _________.

Systematic risk; nondiversifiable risk HW 3

Inflation-indexed Treasury securities are commonly called ____.

TIPS HW 5

Two bonds have identical times to maturity and coupon rates. One is callable at 113, the other at 108. Which should have the higher yield to maturity?

The bond callable at 108 should have the higher yield to maturity HW 5

An investor believes that a bond may temporarily increase in credit risk. Which of the following would be the most liquid method of exploiting this?

The purchase of a credit default swap HW 5

The complete portfolio refers to the investment in _________.

The risk-free asset and the risky portfolio combined HW 3

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

Their 401k accounts were not well diversified HW 3

Money market securities are sometimes referred to as cash equivalents because

They are safe and marketable HW 1

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

U.S. T-bill whose return was indexed to inflation HW 3

Firm-specific risk is also called __________ and __________.

Unique risk; diversifiable risk HW 3

The CFA Institute Standards of Professional Conduct require that members _____.

all of these options HW 2