Question: Consider the characteristics of the following three
Consider the characteristics of the following three stocks: 
The correlation between Pic Image and Tax Help is 0.88. The correlation between Pic Image and Warm Wear is −0.21. The correlation between Tax Help and Warm Wear is −0.19. If you can pick only two stocks for your portfolio, which would you pick? Why?
Transcribed Image Text:
Expected Return Standard Deviation Pic Image Тах Help 11% 19% 19 Warm Wear 14 25
> What does a call provision allow issuers to do, and why would they do it?
> Waller Co. paid a $0.286 dividend per share in 2006, which grew to $0.55 in 2012. This growth is expected to continue. What is the value of this stock at the beginning of 2013 when the required return is 13.7 percent?
> If the risk-free rate is 4 percent and the risk premium is 6 percent, what is the required return?
> Describe the difference between a bond issued as a high-yield bond and one that has become a “fallen angel.”
> You have a portfolio of three bonds. The Long Bond will mature in 19 years and has a 5.5% coupon rate. The Midterm Bond matures in 9 years and has a 6.6% coupon rate. The Short Bond matures in only 2 years and has a 4% coupon rate. A. Construct a spread
> Say that in June of this year, a company issued bonds that are scheduled to mature in three years in June. The coupon rate is 5.75 percent and is paid semiannually. The bond issue was rated AAA. a. Build a spreadsheet that shows how much money the firm p
> Land’o’Toys is a profitable, medium-sized, retail company. Several years ago, it issued a 6½ percent coupon bond, which pays interest semiannually. The bond will mature in ten years and is currently price
> A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
> A client in the 39 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
> A 5.25 percent coupon bond with 14 years left to maturity can be called in four years. The call premium is one year of coupon payments. It is offered for sale at $1,075.50. What is the yield to call of the bond? (Assume interest payments are semiannual
> A 6.75 percent coupon bond with 26 years left to maturity can be called in six years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25. What is the yield to call of the bond? (Assume interest payments are semiannual.)
> A 4.30 percent coupon bond with 14 years left to maturity is offered for sale at $943.22. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
> Suppose that a firm’s recent earnings per share and dividend per share are $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fa
> A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
> If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?
> Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Calculate the price of a 5.2 percent coupon bond with 18 years left to maturity and a market interest rate of 4.6 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Compute the price of a 5.6 percent coupon bond with ten years left to maturity and a market interest rate of 7.0 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Compute the price of a 3.8 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Consider a 2.25 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?
> Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. At the beginning of this year, the CPI was 193.5 and was at 199.6 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?
> A corporate bond with a 6.5 percent coupon has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The n
> A 3.85 percent coupon municipal bond has 18 years left to maturity and has a price quote of 103.20. The bond can be called in eight years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, t
> Consider a firm that had been priced using an 11.5 percent growth rate and a 13.5 percent required return. The firm recently paid a $1.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12 percent rate.
> You are a risk adverse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?
> If an investor’s desired risk level changes over time, should the investor change the composition of his or her portfolio? How?
> Many employees believe that their employer’s stock is less likely to lose half of its value than a well diversified portfolio of stocks. Explain why this belief is erroneous.
> You own only two stocks in your portfolio but want to add more. When you add a third stock, the total risk of your portfolio declines. When you add a tenth stock to the portfolio, the total risk declines. Adding which stock, the third or the tenth, like
> Suppose that Lil John Industries’ equity is currently selling for $27 per share and that there are 2 million shares outstanding. The firm also has 50 thousand bonds outstanding, which are selling at 103 percent of par. If Lil John was considering an acti
> Describe the diversification potential of two assets with a −0.8 correlation. What’s the potential if the correlation is +0.8?
> What does diversification do to the risk and return characteristics of a portfolio?
> You receive an investment newsletter advertisement in the mail. The letter claims that you should invest in a stock that has doubled the return of the S&P 500 Index over the last three months. It also claims that this stock is a surefire safe bet for the
> What does the coefficient of variation measure? Why is a lower value better for the investor?
> Can a company change its total risk level over time? How?
> Which company is likely to have lower total risk, General Electric or Coca-Cola? Why?
> What are the two components of total risk? Which component is part of the risk-return relationship? Why?
> How do we define risk in this chapter and how do we measure it?
> Characterize the historical return, risk, and risk-return relationship of the stock, bond and cash markets.
> Why is the percentage return a more useful measure than the dollar return?
> Suppose that Papa Bell, Inc.’s, equity is currently selling for $45 per share, with 4 million shares outstanding. The firm also has seven thousand bonds outstanding, which are selling at 94 percent of par. If Papa Bell was considering an active change to
> Say you own 200 shares of Mattel and 100 shares of Staples. Would your portfolio return be different if you instead owned 100 shares of Mattel and 200 shares of Staples? Why?
> Many more types of investments are available besides stocks, bonds, and cash securities. Many people invest in real estate and in precious metals, primarily gold. What are the risk and return characteristics of these investments and do they provide diver
> If you own 400 shares of Xerox at $17.34, 500 shares of Qwest at $8.15, and 350 shares of Liz Claiborne at $44.73, what are the portfolio weights of each stock?
> Compute the standard deviation of PG&E’s monthly returns shown in Problem 9-16.
> Compute the standard deviation of Kohls’ monthly returns shown in Problem 9-15.
> The past five monthly returns for PG&E are −3.17 percent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return?
> The past five monthly returns for Kohl’s are 4.11 percent, 3.62 percent, −1.68 percent, 9.25 percent, and −2.56 percent. What is the average monthly return?
> At the beginning of the month, you owned $5,500 of General Dynamics, $7,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 7.44 percent, −1.36 percent, and −0.54 percent. What is your portfolio return
> If you own 200 shares of Alaska Air at $42.88, 350 shares of Best Buy at $51.32, and 250 shares of Ford Motor at $8.51, what are the portfolio weights of each stock?
> GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&ac
> Consider the characteristics of the following three stocks: The correlation between Thumb Devices and Air Comfort is −0.12. The correlation between Thumb Devices and Sport Garb is −0.21. The correlation between Air Com
> Assess the risk-return relationship in T-bills (see Tables 9.2 and 9.4) during each decade since 1950.
> Assess the risk-return relationship of the bond market (see Tables 9.2 and 9.4) during each decade since 1950.
> At the beginning of the month, you owned $6,000 of News Corp, $5,000 of First Data, and $8,500 of Whirlpool. The monthly returns for News Corp, First Data, and Whirlpool were 8.24 percent, −2.59 percent, and 10.13 percent. What’s your portfolio return?
> Year to date, Yum Brands had earned a 3.80 percent return. During the same time period, Raytheon earned 4.26 percent and Coca-Cola earned −0.46 percent. If you have a portfolio made up of 30 percent Yum Brands, 30 percent Raytheon, and 40 percent Coca- C
> Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonalds earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDo
> An investor owns $3,000 of Adobe Systems stock, $6,000 of Dow Chemical, and $7,000 of Office Depot. What are the portfolio weights of each stock?
> An investor owns $6,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $5,000 of Office Depot. What are the portfolio weights of each stock?
> Determine which one of the three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Green has an expected return of 15 percent and risk of 21 percent. The expected return and risk of portfolio Red
> Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 12 percent and risk of 18 percent. The expected return and risk of portfolio Yello
> NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&
> Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 12 percent and standard deviation of 32 percent. The average return and standard deviation of WholeMart are 11 percent and 25 percent;
> Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; a
> Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 12 percent and standard deviation of 32 percent. The average return and standard deviation of WholeMart are 11 percent and 25 percent; and
> Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; an
> A Treasury bond that you own at the beginning of the year is worth $1,055. During the year, it pays $35 in interest payments and ends the year valued at $1,065. What was your dollar return and percent return?
> A corporate bond that you own at the beginning of the year is worth $975. During the year, it pays $35 in interest payments and ends the year valued at $965. What was your dollar return and percent return?
> Sprint Nextel Corp stock ended the previous year at $23.36 per share. It paid a $2.37 per share dividend last year. It ended last year at $18.89. If you owned 500 shares of Sprint, what was your dollar return and percent return?
> FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 200 shares of FedEx, what was your dollar return and percent return?
> You have $20,000 to invest. You want to purchase shares of Xerox at $17.34, Qwest at $8.15, and Liz Claiborne at $44.73. How many shares of each company should you purchase so that your portfolio consists of 25 percent Xerox, 40 percent Qwest, and 35 per
> Below are the monthly returns for March 2011 to February 2016 of three international stock indices; All Ordinaries of Australia, Nikkei 225 of Japan, and FTSE 100 of England. A. Compute and compare each indices’ monthly average return and standard devia
> GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values fo
> Why might firms prefer to conduct stock repurchases through open-market operations rather than through fixed-price tender offers?
> Consider the following annual returns of Molson Coors and International Paper: Compute each stock’s average return, standard deviation, and coefficient of variation. Which stock appears better? Why? Molson International Coors Paper
> Consider the following annual returns of Estee Lauder and Lowe’s Companies: Compute each stock’s average return, standard deviation, and coefficient of variation. Which stock appears better? Why? Estee Lauder Lowe'
> The table below shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio dollar return and percentage return? Beginning Dividend
> The table below shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio dollar return and percentage return? Beginning Dividend
> You have $15,000 to invest. You want to purchase shares of Alaska Air at $42.88, Best Buy at $51.32, and Ford Motor at $8.51. How many shares of each company should you purchase so that your portfolio consists of 30 percent Alaska Air, 40 percent Best B
> You have a portfolio with an asset allocation of 35 percent stocks, 55 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to compute the return of the portfolio in the year 2010 and each year since. T
> You have a portfolio with an asset allocation of 50 percent stocks, 40 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to compute the return of the portfolio in the year 2010 and each year since. T
> Create the spreadsheet below. The spreadsheet should use the returns for assets A and B to form a portfolio return using the weights for each asset shown in cells E1 and E2. The average portfolio return and standard deviation should compute at the bottom
> Cisco Systems has a beta of 1.25. Does this mean that you should expect Cisco to earn a return 25 percent higher than the S&P 500 Index return? Explain.
> How should you handle a case where required return computations from CAPM and the constant growth rate model are very different?
> NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&
> Determine what level of market efficiency each event is consistent with: a. Immediately after an earnings announcement the stock price jumps and then stays at the new level. b. The CEO buys 50,000 shares of his company and the stock price does not change
> If you were to compute beta yourself, what choices would you make regarding the market portfolio, the holding period for the returns (daily, weekly, etc.), and the number of returns? Justify your choices.
> Find a beta estimate from three different sources for General Electric (GE). Compare these three values. Why might they be different?
> If stock prices are not strong-form efficient, then what might be the price reaction to a firm announcing a stock buyback? Explain.
> Describe a stock market bubble. Can a bubble occur in a single stock?
> Why do most investment scams conducted over the Internet and e-mail involve penny stocks instead of S&P 500 Index stocks?
> Explain how the concept of a positive risk-return relationship breaks down if you can systematically find stocks that are overvalued and undervalued.
> Note from Table 10-2 that some technology-oriented firms (Apple) in the Dow Jones Industrial Average have high market risk while others (Intel and Verizon) have low market risk. How do you explain this?
> Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired. Give examples of a portfolio from a person who is very risk averse and a portfolio for someone who is not so averse t
> Consider that you have three stocks in your portfolio and wish to add a fourth. You want to know if the fourth stock will make the portfolio riskier or less risky. Compare and contrast how this would be assessed using standard deviation versus market ris
> GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&ac
> Show on a graph like Figure 10-2 where a stock with a beta of 1.3 would be located on the security market line. Then show where that stock would be located if it is undervalued.
> Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.
> How might the magnitude of the market risk premium impact people’s desire to buy stocks?
> In 2000, the S&P 500 Index earned −9.1 percent while the T-bill yield was 5.9 percent. Does this mean the market risk premium was negative? Explain.
> Why expected return is considered “forward-looking”? What are the challenges for practitioners to utilize expected return?
