Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the market segmentation theory. a. The market expects short-term rates to rise through the relevant future. b. There is greater demand for short-term securities than for long-term securities. c. There is a risk premium associated with more distant maturities.
> What are the coupon rate and current yield on a bond? What happens to these if a bond’s price rises?
> What are premium, discount, and par bonds?
> What is the difference between a market order and a limit order? What is the potential downside to each type of order?
> Evaluate the following statement: “Treasury inflation protected securities (TIPS) pay a fixed coupon.”
> What are the three different types of Treasury STRIPS that are publicly traded?
> Why do you suppose rates on some money market instruments are quoted on a bank discount basis? (Hint: Why use a 360-day year?)
> What is LIBOR? Why is it important?
> Compare and contrast commercial paper and Treasury bills. Which would typically offer a higher interest rate? Why?
> What are pure discount securities? Give two examples.
> What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis?
> What is the “illusion of knowledge” and how does it impact investment performance?
> In the context of behavioral finance, why do men tend to underperform women with regard to the returns in their portfolios?
> Why do 401(k) plans with more bond choices tend to have participants with portfolios more heavily allocated to fixed income?
> Refer to Figure 4.5. Look at the three-year performance for the funds listed. Why do you suppose there are so few poor performers? Hint: Think about the hit TV show Survivor. Figure 4.5: Mutual Funds: Closing Quotes 00 TO: A|B|C|D|E|G|H|J|K|L|M|N|0
> Briefly explain mental accounting and identify the potential negative effect of this bias.
> To a technical analyst, what are support and resistance areas?
> Suppose you are flipping a fair coin in a coin-flipping contest and have flipped eight heads in a row. What is the probability of flipping a head on your next coin flip? Suppose you flipped a head on your ninth toss. What is the probability of flipping a
> In the context of Dow theory, what are the three forces at work at all times? Which is the most important?
> If a market is semi strong-form efficient, is it also weak form efficient? Explain.
> Assume that markets are efficient. During a trading day, American Golf, Inc., announces that it has lost a contract for a large golfing project that, prior to the news, it was widely believed to have secured. If the market is efficient, how should the st
> The efficient markets hypothesis implies that all mutual funds should obtain the same expected risk-adjusted returns. Therefore, we can simply pick mutual funds at random. Is this statement true or false? Explain.
> Critically evaluate the following statement: “Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.”
> A famous economist just announced in The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from investing in the stock market after you read this announcem
> Your broker commented that well-managed firms are better investments than poorly managed firms. As evidence, your broker cited a recent study examining 100 small manufacturing firms that eight years earlier had been listed in an industry magazine as the
> If you were concerned about the liquidity of mutual fund shares that you held, would you rather hold shares in a closed-end fund or an open-end fund? Why?
> What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?
> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
> Referring to Questions 5 and 6, under what circumstances might a company choose not to pay dividends? Data from Questions 5: Why does the value of a share of stock depend on dividends? Data from Questions 6: A substantial percentage of the companies
> A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to Question 5?
> Why does the value of a share of stock depend on dividends?
> Why do we need to convert the typical equity beta to value a firm using FCF?
> What happens in the residual income model when EPS is negative?
> Why do growth stocks tend to have higher P/E ratios than value stocks?
> If a firm has no dividends and has negative earnings, which valuation models are appropriate?
> What is the basic principle behind dividend discount models?
> What are 12b-1 fees? What expenses are 12b-1 fees intended to cover? Many closed-end mutual funds charge a 12b-1 fee. Does this make sense to you? Why or why not?
> What are Vega’s money- (or dollar-) weighted average returns over the five-year period for Scenarios 2 and 3? Scenarlo 2 Scenario 3 a. 7.78% 7.96% b. 7.96% 7.78% с. 9.00% 7.85%
> Is it necessarily true that, all else the same, an index with more stocks is better? What is the issue here?
> There are basically four factors that differentiate stock market indexes. What are they? Comment on each.
> With regard to the NASDAQ, what are inside quotes?
> Suppose Tesla is currently trading at $200. You think that if it reaches $210, it will continue to climb, so you want to buy it if and when it gets there. Should you submit a limit order to buy at $210?
> Why would floor brokers be willing to pay $40,000 per year just for the right to trade on the NYSE?
> Why would venture capitalists provide financing in stages?
> In your local Chevrolet retailer, both a primary and a secondary market are in action. Explain. Is the Chevy retailer a dealer or a broker?
> What is the difference between a money market deposit account and a money market mutual fund? Which is riskier?
> Mr. Green and Ms. Hutchinson divided up their research into return enhancement and diversification benefits. Based upon the stated goals of their research, which of the two approaches is more likely to lead to an appropriate choice? a. Green’s research.
> Mr. Wallace is particularly interested in the effects of a steepening yield curve. Which of the following is most accurate for a steepening curve? a. The price of short-term Treasuries increases relative to long-term Treasuries. b. The price of long-term
> An open-end mutual fund typically keeps a percentage, often around 5 percent, of its assets in cash or liquid money market assets. How does this affect the fund’s return in a year in which the market increases in value? How about during a bad year? Close
> According to the expectations theory, which of the following is closest to the one-year implied forward rate one year from now? a. 6.58 percent b. 5.75 percent c. 6.25 percent
> Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the pure expectations theory. a. The market expects short-term rates to rise through the relevant future. b. There is greater demand for short-term s
> Which of the following would Mr. Higgins, Ms. McHale, and Mr. Sims be least likely to use when making investment decisions? a. Heuristics b. Their personal experiences c. Fundamental analysis
> Which of the following best describes Jack Sims’s behavioral characteristic in investment decisions? a. Jack is overconfident. b. Jack uses frame dependence. c. Jack uses representativeness.
> Which of the following best describes Joanne McHale’s behavioral characteristic in investment decisions? a. Joanne is loss averse. b. Joanne uses the ceteris paribus heuristic. c. Joanne is experiencing the snakebite effect.
> Which of the following best describes the potential problem with Mr. Higgins’s investment strategy? a. He will underestimate the risk of his portfolio and underestimate the impact of an event on stocks. b. He will overestimate the risk of his portfolio a
> Which of the following best describes Tom Higgins’s behavioral characteristic in investment decisions? a. Tom is overconfident. b. Tom uses frame dependence. c. Tom uses anchoring.
> Assume that when Mr. White and Ms. Plain entered their buy order for GHT, the price of the stock increased to $25.45. This is the price at which the trade was executed. Given this impact, the effective spread was _____ that in Question 2 above. a. Lower
> In the example given by Ms. Plain, what was the spread for the GHT stock just prior to execution? a. $0.06 b. $0.02 c. $0.04
> ETFs and index mutual funds hold similar underlying assets. Why might an investor prefer one over the other?
> Which of the following statements regarding market orders is most accurate? Market orders: a. Have price uncertainty, and limit orders have execution uncertainty. b. Have execution uncertainty, and limit orders have price uncertainty. c. And limit orders
> Which of Ms. Harlan’s responses is most likely to make Mr. Phillips consider her a bad candidate for investing in hedge funds? a. I pay a lot of attention to expense and return data from my investments and track their performance closely. b. I pay severa
> If Ms. Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? a. None of them b. Kelly Tool and Die c. Hedge funds
> What are Barbara’s willingness and ability to assume risk? Ability Average Average Above average Willngness a. Above average b. Below average c. Above average
> What is Ms. Harlan’s tolerance for risk? a. Distressed security b. Arbitrage c. Market neutral
> In an attempt to talk Ms. Harlan out of investing in a fund of funds, Mr. Phillips addressed the advantages of investing in individual funds. Which of the following would be his most compelling argument? a. The lower expenses of individual funds b. The l
> An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to lose money?
> An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to earn between −13 percent and 35 p
> Ross Co., Westerfield, Inc., and Jordan Company announced a new agreement to market their respective products in China on July 18, February 12, and October 7, respectively. Given the information below, calculate the cumulative abnormal return (CAR) for t
> A stock is currently priced at $53.87 and the futures on the stock that expire in six months have a price of $55.94. The risk-free rate is 5 percent and the stock is not expected to pay a dividend. Is there an arbitrage opportunity here? How would you ex
> Is it true that the NAV of a money market mutual fund never changes? How is this possible?
> A non-dividend-paying stock is currently priced at $48.15 per share. A futures contract maturing in five months has a price of $48.56 and the risk-free rate is 4 percent. Describe how you could make an arbitrage profit from this situation. How much could
> You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.15 measured relative to the S&P Midcap 400, and the net asset value of the fund is
> You are short 15 gasoline futures contracts, established at an initial settle price of $2.085 per gallon, where each contract represents 42,000 gallons. Your initial margin to establish the position is $7,425 per contract and the maintenance margin is $6
> You are long 10 gold futures contracts, established at an initial settle price of $1,500 per ounce, where each contract represents 100 troy ounces. Your initial margin to establish the position is $12,000 per contract and the maintenance margin is $11,20
> Margin Call (LO2, CFA2) Suppose the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts today, where each contract represents 42,000 gallons. Tomorrow, the cont
> Calculate Jensen’s alpha for the fund, as well as its information ratio. Data for Problem 19: You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know
> You are constructing a portfolio of two assets, asset A and asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29 percent and 48 percent, respectively. The correlation betwee
> For the stock in Problem 13, what is the smallest expected gain over the next year with a probability of 1 percent? Does this number make sense? What does this tell you about stock return distributions? Data from Problem 13: A stock has an annual retur
> Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4 percent, the expected return on the market is 11.5 percent, and the betas of the two stocks are 1.2 and 0.9,
> Consider the following information on Stocks I and II: The market risk premium is 8 percent and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riski
> Given that no-load funds are widely available, why would a rational investor pay a front-end load? More generally, why don’t fund investors always seek out funds with the lowest loads, management fees, and other fees?
> Fill in the following table, supplying all the missing information. Use this information to calculate the security’s beta.
> Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Security Beta Expected Return Peat Co. 1.05 12.3 Re-Peat Co. 0.90
> Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table for portfolios of asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfoli
> You are going to invest in asset J and asset S. Asset J has an expected return of 13 percent and a standard deviation of 54 percent. Asset S has an expected return of 10 percent and a standard deviation of 19 percent. The correlation between the two asse
> In Problem 12, what is the standard deviation if the correlation is +1? 0? −1? As the correlation declines from +1 to −1 here, what do you see happening to portfolio volatility? Why? Data from Problem 12: Use the fol
> Suppose the yield to maturity on the bond in Problem 29 increases by 0.25 percent. What is the new price of the bond using duration? What is the new price of the bond using the bond pricing formula? What if the yield to maturity increases by 1 percent? B
> A Treasury bond with 8 years to maturity is currently quoted at 106:16. The bond has a coupon rate of 7.5 percent. What is the yield value of a 32nd for this bond?
> Fooling Company has a 10 percent callable bond outstanding on the market with 25 years to maturity, call protection for the next 10 years, and a call premium of $100. What is the yield to call (YTC) for this bond if the current price is 108 percent of pa
> Suppose you buy a 6 percent coupon bond today for $1,080. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What p
> Bond J is a 4 percent coupon bond. Bond K is an 8 percent coupon bond. Both bonds have 10 years to maturity and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates sudde
> Refer to Table 1.1 for large-company stock and T-bill returns for the period 1973–1977: a. Calculate the observed risk premium in each year for the common stocks. b. Calculate the average returns and the average risk premium over this
> Both bond A and bond B have 6 percent coupons and are priced at par value. Bond A has 5 years to maturity, while bond B has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in price of bond A? Of bond B? I
> Bond P is a premium bond with an 8 percent coupon, a YTM of 6 percent, and 15 years to maturity. Bond D is a discount bond with an 8 percent coupon, a YTM of 10 percent, and also 15 years to maturity. If interest rates remain unchanged, what do you expec
> A zero coupon bond with a 6 percent YTM has 20 years to maturity. Two years later, the price of the bond remains the same. What’s going on here?
> You observe that the current interest rate on short-term U.S. Treasury bills is 1.64 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by market analysts to gauge the inflation rate, currently i
> Suppose you purchase a $1,000 TIPS on January 1, 2016. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent, respectively. For each six-month period, calculate the
> Suppose the (quoted) yield on each of the six STRIPS increases by 0.05 percent. Calculate the percentage change in price for the one-year, three-year, and six-year STRIPS. Which one has the largest price change? Now suppose that the quoted price on each
> According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on November 15, 2016? What is the corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS?
> Calculate the quoted yield for each of the STRIPS given in the table above. Does the market expect interest rates to go up or down in the future? Data for Problem 14: U.S. Treasury STRIPS, close of business November 15, 2015:
> Another technical indicator is the put/call ratio. The put/call ratio is the number of put options traded divided by the number of call options traded. The put/ call ratio can be constructed on the market or an individual stock. Below you will find the n
