investment exercisesTBChap08new
投资学 第八版 英文答案 CHAPTER 1 THE INVESTMENT ENVIRONMENT
CHAPTER 1: THE INVESTMENT ENVIRONMENTPROBLEM SETS1. Ultimately, it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering creates new products that allow them to manage their portfoliosof financial assets more efficiently. Because bundling and unbundlingcreates financial products with new properties and sensitivities to various sources of risk, it allows investors to hedge particular sources of riskmore efficiently.2. Securitization requires access to a large number of potential investors. To attract these investors, the capital market needs:a safe system of business laws and low probability of confiscatorytaxation/regulation;a well-developed investment banking industry;a well-developed system of brokerage and financial transactions, and;well-developed media, particularly financial reporting.These characteristics are found in (indeed make for) a well-developedfinancial market.3. Securitization leads to disintermediation; that is, securitization provides a means for market participants to bypass intermediaries. For example, mortgage-backed securities channel funds to the housing market without requiring that banks or thrift institutions make loans from theirown portfolios. As securitization progresses, financial intermediariesmust increase other activities such as providing short-term liquidity to consumers and small business, and financial services.4. Financial assets make it easy for large firms to raise the capital needed to finance their investments in real assets. If General Motors, for example, could not issue stocks or bonds to the general public, it wouldhave a far more difficult time raising capital. Contraction of the supplyof financial assets would make financing more difficult, thereby increasingthe cost of capital. A higher cost of capital results in less investment and lower real growth.5. Even if the firm does not need to issue stock in any particular year, the stock market is still important to the financial manager. The stock price provides important information about how the market values the firm's investment projects. For example, if the stock price rises considerably, managers might conclude that the market believes the firm's futureprospects are bright. This might be a useful signal to the firm to proceed with an investment such as an expansion of the firm's business.In addition, the fact that shares can be traded in the secondary market makes the shares more attractive to investors since investors know that, when they wish to, they will be able to sell their shares. This in turn makes investors more willing to buy shares in a primary offering, and thus improves the terms on which firms can raise money in the equity market.6. a. Cash is a financial asset because it is the liability of the federal government.b. No. The cash does not directly add to the productive capacity of the economy.c. Yes.d. Society as a whole is worse off, since taxpayers, as a group will make up for the liability.7. a. The bank loan is a financial liability for Lanni. (Lanni's IOU is the bank's financial asset.) The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note (that is, Lanni’s IOU to the bank).b. Lanni transfers financial assets (cash) to the software developers.In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed; cash is simply transferred from one partyto another.c. Lanni gives the real asset (the software) to Microsoft in exchangefor a financial asset, 1,500 shares of Microsoft stock. If Microsoftissues new shares in order to pay Lanni, then this would represent the creation of new financial assets.d. Lanni exchanges one financial asset (1,500 shares of stock) for another ($120,000). Lanni gives a financial asset ($50,000 cash) to the bank and gets back another financial asset (its IOU). The loan is "destroyed" in the transaction, since it is retired when paid off and no longer exists.8. a.Assets Liabilities & Shareholders’ equityCash $ 70,000 Bank loan $ 50,000Computers 30,000 Shareholders’equity50,000Total $100,000 Total $100,000 Ratio of real assets to total assets = $30,000/$100,000 = 0.30b.Assets Liabilities & Shareholders’ equitySoftwareproduct*$ 70,000 Bank loan $ 50,000 Computers 30,000 Shareholders’equity50,000Total $100,000 Total $100,000 *Valued at costRatio of real assets to total assets = $100,000/$100,000 = 1.0 c.Assets Liabilities & Shareholders’ equityMicrosoft shares $120,000 Bank loan $ 50,000Computers 30,000 Shareholders’equity100,000Total $150,000 Total $150,000Ratio of real assets to total assets = $30,000/$150,000 = 0.20 Conclusion: when the firm starts up and raises working capital, it is characterized by a low ratio of real assets to total assets. When it is in full production, it has a high ratio of real assets to total assets. Whenthe project "shuts down" and the firm sells it off for cash, financial assets once again replace real assets.9. For commercial banks, the ratio is: $107.5/$10,410.9 = 0.010For non-financial firms, the ratio is: $13,295/$25,164 = 0.528The difference should be expected primarily because the bulk of the business of financial institutions is to make loans; which are financial assets for financial institutions.10. a. Primary-market transactionb. Derivative assetsc. Investors who wish to hold gold without the complication and cost of physical storage.11. a. A fixed salary means that compensation is (at least in the short run) independent of the firm's success. This salary structure does not tie the manager’s immediate compensation to the success of the firm. However, the manager might view this as the safest compensation structure and therefore value it more highly.b. A salary that is paid in the form of stock in the firm means that the manager earns the most when the shareholders’ wealth is maximized. This structure is therefore most likely to align the interests of managers and shareholders. If stock compensation is overdone, however, the manager might view it as overly risky since the manager’s career is already linked to the firm, and this undiversified exposure would be exacerbated with a large stock position in the firm.c. Call options on shares of the firm create great incentives for managers to contribute to the firm’s success. In some cases, however, stock options can lead to other agency problems. For example, a manager with numerous call options might be tempted to take on a very risky investment project, reasoning that if the project succeeds the payoff will be huge, while if it fails, the losses are limited to the lost value of the options. Shareholders, in contrast, bear the losses as well as the gains on the project, and might be less willing to assume that risk.12. Even if an individual shareholder could monitor and improve managers’ performance, and thereby increase the value of the firm, the payoff would be small, since the ownership share in a large corporation would be very small. For example, if you own $10,000 of GM stock and can increase the value of the firm by 5%, a very ambitious goal, you benefit by only: 0.05 $10,000 = $500In contrast, a bank that has a multimillion-dollar loan outstanding to the firm has a big stake in making sure that the firm can repay the loan. Itis clearly worthwhile for the bank to spend considerable resources to monitor the firm.13. Mutual funds accept funds from small investors and invest, on behalf of these investors, in the national and international securities markets. Pension funds accept funds and then invest, on behalf of current and future retirees, thereby channeling funds from one sector of the economy to another.Venture capital firms pool the funds of private investors and invest in start-up firms.Banks accept deposits from customers and loan those funds to businesses, or use the funds to buy securities of large corporations.14. Treasury bills serve a purpose for investors who prefer a low-risk investment. The lower average rate of return compared to stocks is the price investors pay for predictability of investment performance and portfolio value.15. With a “top-down” investing style, you focus on asset allocation or the broad composition of the entire portfolio, which is the major determinant of overall performance. Moreover, top-down management is the natural way to establish a portfolio with a level of risk consistent with your risk tolerance. The disadvantage of an exclusive emphasis on top-down issues is that you may forfeit the potential high returns that could result from identifying and concentrating in undervalued securities or sectors of the market.With a “bottom-up” investing style, you try to benefit from identifying undervalued securities. The disadvantage is that you tend to overlook theoverall composition of your portfolio, which may result in a non-diversified portfolio or a portfolio with a risk level inconsistent withyour level of risk tolerance. In addition, this technique tends to require more active management, thus generating more transaction costs. Finally, your analysis may be incorrect, in which case you will have fruitlessly expended effort and money attempting to beat a simple buy-and-hold strategy.16. You should be skeptical. If the author actually knows how to achieve such returns, one must question why the author would then be so ready tosell the secret to others. Financial markets are very competitive; one of the implications of this fact is that riches do not come easily. High expected returns require bearing some risk, and obvious bargains are fewand far between. Odds are that the only one getting rich from the book isits author.17. a. The SEC website defines the difference between saving and investing in terms of the investment alternatives or the financial assetsthe individual chooses to acquire. According to the SEC website, saving is the process of acquiring a “safe” financial asset and investing is the process of acquiring “risky” financial assets.b. The economist’s definition of savings is the difference between income and consumption. Investing is the process of allocating one’s savings among available assets, both real assets and financial assets. The SEC definitions actually represent (according the economist’s definition) two kinds of investment alternatives.18. As is the case for the SEC definitions (see Problem 17), the SIA defines saving and investing as acquisition of alternative kinds offinancial assets. According to the SIA, saving is the process of acquiring safe assets, generally from a bank, while investing is the acquisition of other financial assets, such as stocks and bonds. On the other hand, the definitions in the chapter indicate that saving means spending less than one’s income. Investing is the process of allocating one’s savings among financial assets, including savings account deposits and money market accounts (“saving” according to the SIA), other financial assets such a s stocks and bonds (“investing” according to the SIA), as well as real assets.。
英文版罗斯公司理财习题答案ChapWord版
CHAPTER 8MAKING CAPITAL INVESTMENT DECISIONSAnswers to Concepts Review and Critical Thinking Questions1.In this context, an opportunity cost refers to the value of an asset or other input that will be used in aproject. The relevant cost is what the asset or input is actually worth today, not, for example, what it cost to acquire.2. a.Yes, the reduction in the sales of the company’s other products, referred to as erosion, andshould be treated as an incremental cash flow. These lost sales are included because they are a cost (a revenue reduction) that the firm must bear if it chooses to produce the new product.b. Yes, expenditures on plant and equipment should be treated as incremental cash flows. Theseare costs of the new product line. However, if these expenditures have already occurred, they are sunk costs and are not included as incremental cash flows.c. No, the research and development costs should not be treated as incremental cash flows. Thecosts of research and development undertaken on the product during the past 3 years are sunk costs and should not be included in the evaluation of the project. Decisions made and costs incurred in the past cannot be changed. They should not affect the decision to accept or reject the project.d. Yes, the annual depreciation expense should be treated as an incremental cash flow.Depreciation expense must be taken into account when calculating the cash flows related to a given project. While depreciation is not a cash expense that directly affects cash flow, it decreases a firm’s net income and hence, lowers its tax bill for the year. Because of this depreciation tax shield, the firm has more cash on hand at the end of the year than it would have had without expensing depreciation.e.No, dividend payments should not be treated as incremental cash flows. A firm’s decision topay or not pay dividends is independent of the decision to accept or reject any given investment project. For this reason, it is not an incremental cash flow to a given project. Dividend policy is discussed in more detail in later chapters.f.Yes, the resale value of plant and equipment at the end of a project’s life should be treated as anincremental cash flow. The price at which the firm sells the equipment is a cash inflow, and any difference between the book value of the equipment and its sale price will create gains or lossesthat result in either a tax credit or liability.g.Yes, salary and medical costs for production employees hired for a project should be treated asincremental cash flows. The salaries of all personnel connected to the project must be included as costs of that project.3.Item I is a relevant cost because the opportunity to sell the land is lost if the new golf club is produced. Item II is also relevant because the firm must take into account the erosion of sales of existing products when a new product is introduced. If the firm produces the new club, the earnings from the existing clubs will decrease, effectively creating a cost that must be included in the decision.Item III is not relevant because the costs of Research and Development are sunk costs. Decisions made in the past cannot be changed. They are not relevant to the production of the new clubs.4.For tax purposes, a firm would choose MACRS because it provides for larger depreciationdeductions earlier. These larger deductions reduce taxes, but have no other cash consequences.Notice that the choice between MACRS and straight-line is purely a time value issue; the total depreciation is the same; only the timing differs.5.It’s probably only a mild over-simplification. Current liabilities will all be paid, presumably. Thecash portion of current assets will be retrieved. Some receivables won’t be collected, and some inventory will not be sold, of course. Counterbalancing these losses is the fact that inventory sold above cost (and not replaced at the end of the project’s life) acts to increase working capital. These effects tend to offset one another.6.Management’s discretion to set the firm’s capital structure is applicable at the firm level. Since anyone particular project could be financed entirely with equity, another project could be financed with debt, and the firm’s overall capital structure remains unchanged, financing cost s are not relevant in the analysis of a project’s incremental cash flows according to the stand-alone principle.7.The EAC approach is appropriate when comparing mutually exclusive projects with different livesthat will be replaced when they wear out. This type of analysis is necessary so that the projects havea common life span over which they can be compared; in effect, each project is assumed to existover an infinite horizon of N-year repeating projects. Assuming that this type of analysis is valid implies that the project cash flows remain the same forever, thus ignoring the possible effects of, among other things: (1) inflation, (2) changing economic conditions, (3) the increasing unreliability of cash flow estimates that occur far into the future, and (4) the possible effects of future technology improvement that could alter the project cash flows.8.Depreciation is a non-cash expense, but it is tax-deductible on the income statement. Thusdepreciation causes taxes paid, an actual cash outflow, to be reduced by an amount equal to the depreciation tax shield, t c D. A reduction in taxes that would otherwise be paid is the same thing as a cash inflow, so the effects of the depreciation tax shield must be added in to get the total incremental aftertax cash flows.9.There are two particularly important considerations. The first is erosion. Will the “essentialized”book simply displace copies of the existing book that would have otherwise been sold? This is of special concern given the lower price. The second consideration is competition. Will other publishers step in and produce such a product? If so, then any erosion is much less relevant. A particular concern to book publishers (and producers of a variety of other product types) is that the publisher only makes money from the sale of new books. Thus, it is important to examine whether the new book would displace sales of used books (good from the publisher’s perspective) or new books (not good). The concern arises any time there is an active market for used product.10.Definitely. The damage to Porsche’s reputation is definitely a factor the company needed to consider.If the reputation was damaged, the company would have lost sales of its existing car lines.11.One company may be able to produce at lower incremental cost or market better. Also, of course,one of the two may have made a mistake!12.Porsche would recognize that the outsized profits would dwindle as more products come to marketand competition becomes more intense.Solutions to Questions and ProblemsNOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.Basicing the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = [($5 × 2,000 – ($2 × 2,000)](1 – 0.35) + 0.35($10,000/5)OCF = $4,600So, the NPV of the project is:NPV = –$10,000 + $4,600(PVIFA17%,5)NPV = $4,7172.We will use the bottom-up approach to calculate the operating cash flow for each year. We also mustbe sure to include the net working capital cash flows each year. So, the total cash flow each year will be:Year 1 Year 2 Year 3 Year 4 Sales Rs.7,000 Rs.7,000 Rs.7,000 Rs.7,000Costs 2,000 2,000 2,000 2,000Depreciation 2,500 2,500 2,500 2,500EBT Rs.2,500 Rs.2,500 Rs.2,500 Rs.2,500Tax 850 850 850 850Net income Rs.1,650 Rs.1,650 Rs.1,650 Rs.1,650OCF 0 Rs.4,150 Rs.4,150 Rs.4,150 Rs.4,150Capital spending –Rs.10,000 0 0 0 0NWC –200 –250 –300 –200 950Incremental cashflow –Rs.10,200 Rs.3,900 Rs.3,850 Rs.3,950 Rs.5,100The NPV for the project is:NPV = –Rs.10,200 + Rs.3,900 / 1.10 + Rs.3,850 / 1.102 + Rs.3,950 / 1.103 + Rs.5,100 / 1.104NPV = Rs.2,978.333. Using the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = (R2,400,000 – 960,000)(1 – 0.30) + 0.30(R2,700,000/3)OCF = R1,278,000So, the NPV of the project is:NPV = –R2,700,000 + R1,278,000(PVIFA15%,3)NPV = R217,961.704.The cash outflow at the beginning of the project will increase because of the spending on NWC. Atthe end of the project, the company will recover the NWC, so it will be a cash inflow. The sale of the equipment will result in a cash inflow, but we also must account for the taxes which will be paid on this sale. So, the cash flows for each year of the project will be:Year Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,278,0002 1,278,0003 1,725,000 = R1,278,000 + 300,000 + 210,000 + (0 – 210,000)(.30)And the NPV of the project is:NPV = –R3,000,000 + R1,278,000(PVIFA15%,2) + (R1,725,000 / 1.153)NPV = R211,871.465. First we will calculate the annual depreciation for the equipment necessary for the project. Thedepreciation amount each year will be:Year 1 depreciation = R2.7M(0.3330) = R899,100Year 2 depreciation = R2.7M(0.4440) = R1,198,800Year 3 depreciation = R2.7M(0.1480) = R399,600So, the book value of the equipment at the end of three years, which will be the initial investment minus the accumulated depreciation, is:Book value in 3 years = R2.7M – (R899,100 + 1,198,800 + 399,600)Book value in 3 years = R202,500The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = R202,500 + (R202,500 – 210,000)(0.30)Aftertax salvage value = R207,750To calculate the OCF, we will use the tax shield approach, so the cash flow each year is:OCF = (Sales – Costs)(1 – t C) + t C DepreciationYear Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,277,730.00 = (R1,440,000)(.70) + 0.30(R899,100)2 1,367,640.00 = (R1,440,000)(.70) + 0.30(R1,198,800)3 1,635,630.00 = (R1,440,000)(.70) + 0.30(R399,600) + R207,750 + 300,000Remember to include the NWC cost in Year 0, and the recovery of the NWC at the end of the project.The NPV of the project with these assumptions is:NPV = – R3.0M + (R1,277,730/1.15) + (R1,367,640/1.152) + (R1,635,630/1.153)NPV = R220,655.206. First, we will calculate the annual depreciation of the new equipment. It will be:Annual depreciation charge = €925,000/5Annual depreciation charge = €185,000The aftertax salvage value of the equipment is:Aftertax salvage value = €90,000(1 – 0.35)Aftertax salvage value = €58,500Using the tax shield approach, the OCF is:OCF = €360,000(1 – 0.35) + 0.35(€185,000)OCF = €298,750Now we can find the project IRR. There is an unusual feature that is a part of this project. Accepting this project means that we will reduce NWC. This reduction in NWC is a cash inflow at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC. So, at the end of the project, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. The IRR of the project is:NPV = 0 = –€925,000 + 125,000 + €298,750(PVIFA IRR%,5) + [(€58,500 – 125,000) / (1+IRR)5]IRR = 23.85%7.First, we will calculate the annual depreciation of the new equipment. It will be:Annual depreciation = £390,000/5Annual depreciation = £78,000Now, we calculate the aftertax salvage value. The aftertax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so:Aftertax salvage value = MV + (BV – MV)t cVery often, the book value of the equipment is zero as it is in this case. If the book value is zero, the equation for the aftertax salvage value becomes:Aftertax salvage value = MV + (0 – MV)t cAftertax salvage value = MV(1 – t c)We will use this equation to find the aftertax salvage value since we know the book value is zero. So, the aftertax salvage value is:Aftertax salvage value = £60,000(1 – 0.34)Aftertax salvage value = £39,600Using the tax shield approach, we find the OCF for the project is:OCF = £120,000(1 – 0.34) + 0.34(£78,000)OCF = £105,720Now we can find the project NPV. Notice that we include the NWC in the initial cash outlay. The recovery of the NWC occurs in Year 5, along with the aftertax salvage value.NPV = –£390,000 – 28,000 + £105,720(PVIFA10%,5) + [(£39,600 + 28,000) / 1.15]NPV = £24,736.268.To find the BV at the end of four years, we need to find the accumulated depreciation for the firstfour years. We could calculate a table with the depreciation each year, but an easier way is to add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:BV4 = $9,300,000 – 9,300,000(0.2000 + 0.3200 + 0.1920 + 0.1150)BV4 = $1,608,900The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = $2,100,000 + ($1,608,900 – 2,100,000)(.40)Aftertax salvage value = $1,903,5609. We will begin by calculating the initial cash outlay, that is, the cash flow at Time 0. To undertake theproject, we will have to purchase the equipment and increase net working capital. So, the cash outlay today for the project will be:Equipment –€2,000,000NWC –100,000Total –€2,100,000Using the bottom-up approach to calculating the operating cash flow, we find the operating cash flow each year will be:Sales €1,200,000Costs 300,000Depreciation 500,000EBT €400,000Tax 140,000Net income €260,000The operating cash flow is:OCF = Net income + DepreciationOCF = €260,000 + 500,000OCF = €760,000To find the NPV of the project, we add the present value of the project cash flows. We must be sure to add back the net working capital at the end of the project life, since we are assuming the net working capital will be recovered. So, the project NPV is:NPV = –€2,100,000 + €760,000(PVIFA14%,4) + €100,000 / 1.144NPV = €173,629.3810.We will need the aftertax salvage value of the equipment to compute the EAC. Even though theequipment for each product has a different initial cost, both have the same salvage value. The aftertax salvage value for both is:Both cases: aftertax salvage value = $20,000(1 – 0.35) = $13,000To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is:OCF = – $34,000(1 – 0.35) + 0.35($210,000/3) = $2,400NPV = –$210,000 + $2,400(PVIFA14%,3) + ($13,000/1.143) = –$195,653.45EAC = –$195,653.45 / (PVIFA14%,3) = –$84,274.10And the OCF and NPV for Techron II is:OCF = – $23,000(1 – 0.35) + 0.35($320,000/5) = $7,450NPV = –$320,000 + $7,450(PVIFA14%,5) + ($13,000/1.145) = –$287,671.75EAC = –$287,671.75 / (PVIFA14%,5) = –$83,794.05The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost.。
(完整word版)投资学题库Chap008
Chapter 08Index Models Multiple Choice Questions1.As diversification increases， the total variance of a portfolio approachesA. 0.B。
1.C。
t he variance of the market portfolio.D. i nfinity.E。
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4。
As diversification increases, the unsystematic risk of a portfolio approachesA. 1。
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5.As diversification increases, the unique risk of a portfolio approachesA. 1。
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6.The index model was first suggested byA。
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介绍投资的英语小作文
介绍投资的英语小作文投资（Investment）。
Investment is the act of allocating resources, usually money, with the expectation of generating income or profitin the future. It plays a crucial role in both individual financial planning and the broader economy. In this essay, we will explore the concept of investment, its importance, different types of investments, and some key principles to consider when making investment decisions.Firstly, let's delve into why investment is essential. Investment enables individuals and organizations to grow their wealth over time. By putting money into variousassets such as stocks, bonds, real estate, or businesses, investors aim to earn a return on their capital. Thisreturn can come in the form of dividends, interest payments, or capital appreciation. Moreover, investment fuels economic growth by providing funds for businesses to expand, innovate, and create jobs. It also facilitates theefficient allocation of resources in the economy by directing capital to its most productive uses.Now, let's explore the different types of investments available to investors:1. Stocks: Stocks represent ownership in a company. When you buy shares of a company's stock, you become a partial owner of that company. Stockholders may benefit from capital appreciation if the company's value increases over time, as well as from dividend payments if the company distributes profits to its shareholders.2. Bonds: Bonds are debt securities issued by governments or corporations to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity.3. Real Estate: Real estate investment involves purchasing properties such as residential homes, commercial buildings, or land with the expectation of earning rentalincome and/or capital appreciation. Real estate can provide diversification to an investment portfolio and serve as a hedge against inflation.4. Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They are managed by professional fund managers and offer investors access to a diversified investment portfolio with relatively low investment amounts.5. Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They typically track a specific index, sector, commodity, or asset class and provide investors with exposure to a diversified portfolio of assets.6. Commodities: Commodities such as gold, silver, oil, and agricultural products can be traded as investment assets. They offer diversification benefits and can serveas a hedge against inflation and currency fluctuations.When making investment decisions, investors shouldconsider several key principles:1. Diversification: Diversifying across different asset classes, industries, and geographic regions can help reduce the risk of investment losses. A well-diversified portfolio is less vulnerable to the performance of any single investment.2. Risk and Return: Investors should understand the relationship between risk and return. Generally, investments with higher potential returns tend to come with higher risk. It's essential to assess your risk tolerance and investment goals before making investment decisions.3. Time Horizon: Your investment time horizon, or the length of time you plan to hold an investment, should align with your financial goals. Longer time horizons may allow you to take on more risk and potentially earn higher returns, while shorter time horizons may necessitate a more conservative investment approach.4. Cost Considerations: Pay attention to investmentcosts such as fees, commissions, and taxes, as they can erode your investment returns over time. Choose low-cost investment options whenever possible to maximize your net returns.In conclusion, investment is a vital tool for growing wealth and achieving financial goals. By understanding the different types of investments available and adhering to key investment principles, investors can make informed decisions to build a successful investment portfolio over time. Remember to conduct thorough research, seek professional advice when needed, and stay disciplined in your investment approach.。
投资学精要（博迪）（第五版）习题答案英文版chapter7
投资学精要（博迪）（第五版）习题答案英文版chapter7Essentials of Investments (BKM 5th Ed.)Answers to Selected Problems – Lecture 4Note: The solutions to Example 6.4 and the concept checks are provided in the text.Chapter 6:23. In the regression of the excess return of Stock ABC on the market, the square of thecorrelation coefficient is 0.296, which indicates that 29.6% of the variance of the excesss return of ABC is explained by the market (systematic risk).Chapter 7:3. E(R p) = R f + βp[E(R M) - R f]0.20 = 0.05 + β(0.15 - 0.05)β = 0.15/0.10 = 1.5β=0 implies E(R)=R f, not zero.6. a) False:b) False: Investors of a diversified portfolio require a risk premium for systematic risk. Only thesystematic portion of total risk is compensated.c) False: 75% of the portfolio should be in the market and 25% in T-bills.βp=(0.75 * 1) + (0.25 * 0) = 0.758. Not possible. Portfolio A has a higher beta than B, but a lower expected return.9. Possible. If the CAPM is valid, the expected rate of return compensates only for market risk (beta),rather than for nonsystematic risk. Part of A’s risk may be nonsystematic.10. Not possible. If the CAPM is valid, the market portfolio is the most efficient and a higher reward-to-variability ratio than any other security. In other words, the CML must be better than the CAL for any other security. Here, the slope of the CAL for A is 0.5 while the slope of the CML is 0.33.11. Not possible. Portfolio A clearly dominates the market portfolio with a lower standard deviationand a higher expected return. The CML must be better than the CAL for security A.12. Not possible. Security A has an expected return of 22% based on CAPM and an actual return of16%. Security A is below the SML and is therefore overpriced. It is also clear that security A has a higher beta than the market, but a lower return which is not consistent with CAPM.13. Not possible. Security A has an expected return of 17.2% and an actual return of 16%. Security A isbelow the SML and is therefore overpriced.14. Possible. Portfolio A has a lower expected return and lower standard deviation than the market andthus plots below the CML.17. Using the SML: 6 = 8 + β(18 – 8)β = –2/10 = –.221. The expected return of portfolio F equals the risk-free rate since its beta equals 0. Portfolio A’sratio of risk premium to beta is: (10-4)/1 = 6.0%. You can think of this as the slope of the pricing line for Security A. Portfolio E’s ratio of risk premium to beta is: (9-4)/(2/3) = 7.5%, suggesting that Portfolio E is not on the same pricing line as security A. In other words, there is an arbitrage opportunity here.For example, if you created a new portfolio by investing 1/3in the risk-free security and 2/3 insecurity A, you would have a portfolio with a beta of 2/3 and an expected return equal to (1/3)*4% + (2/3)*10% = 8%. Since this new portfolio has the same beta as security E (2/3) but a lowerexpected return (8% vs. 9%) there is clearly an arbitrage opportunity.26. The APT factors must correlate with major sources of uncertainty in the economy. These factorswould correlate with unexpected changes in consumption and investment opportunities. DNP, the rate of inflation, and interest rates are candidates for factors that can be expected to determine risk premia. Industrial production varies with the business cycle, and thus is a candidate for a factor that is correlated with uncertainties related to investment opportunities in the economy.27. A revised estimate of the rate of return on this stock would be the old estimate plus the sum of the expected changes in the factors multiplied by the sensitivity coefficients to each factor:revised R i = 14% + 1.0(1%) + 0.4(1%) = 15.4%28. E(R P) = r f + βP1[E(R1) - R f] + βP2[E(R2) - R f]Use each security’s sensitivity to the factors to solve for the risk premia on the factors:Portfolio A: 40% = 7% + 1.8γ1 + 2.1γ2Portfolio B: 10% = 7% + 2.0γ1 + (-0.5)γ2Solving these two equations simultaneously gives γ1 = 4.47 and γ2 = 11.88.This gives the following expected return beta relationship for the economy:E(R P) = 0.07 + 4.47βP1 + 11.88βP230. d. From the CAPM, the fair expected return = 8% + 1.25 (15% - 8%) = 16.75%Actually expected return = 17%α = 17% - 16.75% = 0.25%31. d. The risk-free rate34. d. You need to know the risk-free rate. For example, if we assume a risk-free rate of 4%, then the alphaof security R is 2.0% and it lies above the SML. If we assume a risk-free rate of 8%, then the alpha ofsecurity R is zero and it lies on the SML.40. d.。
投资学精要(博迪)(第五版)习题答案英文版chapter3
Essentials of Investments (BKM 5th Ed.)Answers to Selected Problems – Lecture 2Chapter 3:1. a) In addition to the explicit fees of $70,000, FBN appears to have paid an implicit pricein underpricing of the IPO. The underpricing is $3/share or $300,000 total, implyingtotal costs of $370,000.b) No. The underwriters do not capture the part of the costs corresponding to theunderpricing. The underpricing may be a rational marketing strategy. Without it, theunderwriters would need to spend more resources to place the issue with the public.They would then need to charge higher explicit fees to the issuing firm. The issuingfirm may be just as well off paying the implicit issuance cost represented by theunderpricing.2. Potential losses are unlimited due to the fact that, theoretically, there is no limit on the priceincrease of a stock.The stop-buy order limits the losses from the short position. If the stop-buy order can be filled at $128, the maximum possible loss is $8 per share. One should keep in mind, however, that while the stop-buy order is triggered when the stock price hits $128, the order may not be filled at exactly $128.6. a) The market buy order is filled at $50.25 (the best limit-sell order) due to pricepriority.b) The next market buy order would be filled at $51.50 since this is the next best price.c) You should increase your position. There is considerable buying pressure just below $50,meaning that downside risk is limited. In contrast, limit sell orders are sparse,meaning that a moderate buy order could result in a substantial price increase.7. a) Buy 200 shares of Telecom at $50/share = $10,000.Sell 200 shares of Telecom at $50*(1.1) = $11,000.Pay interest of $5,000 * .08 = $400.Your Holding Period Return (HPR) = ($11,000 - 10,000 - 400)/$5,000 = 12%b) Ignoring the interest payment,Margin = (Value of Securities - Loan)/Value of Securities0.30 = (200*P - $5,000)/200*P or P = $35.719. Cost of purchase is $40 x 500 = $20,000. You borrow $5000 from your broker, and invest $15,000of your own funds. Your margin account starts out with a net worth of $15,000.a. (i) Net worth rises by $2,000 from $15,000 to $44 × 500 – $5,000 = $17,000.Percentage gain = $2,000/$15,000 = .133 = 13.3%(ii) With unchanged price, net worth remains unchanged.Percentage gain = zero(iii) Net worth falls to $36 × 500 – $5,000 = $13,000.Percentage gain = –$2,000/$15,000 = –.133 = –13.3%The relationship between the percentage change in the price of the stock and the investor’s percentage gain is given by:% gain = % change in price × Total investment investor's initial equity = % change in price × 1.33For example, when the stock price rises from 40 to 44, the percentage change in price is 10%, while the percentage gain for the investor is 1.33 times as large, 13.3%:% gain = 10% × $20,000$15,000 = 13.3%b. The value of the 500 shares is 500P. Equity is 500P – 5000. You will receive a margin call when500P-5000500P = .25 or when P = $13.33.c. The value of the 500 shares is 500P. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is only 500P – $10,000. You will receive a margin call when500P-10,000500P = .25 or when P = $26.67.With less equity in the account, you are far more vulnerable to a margin call.d. The margin loan with accumulated interest after one year is $5,000 x 1.08 = $5,400. Therefore, equity in your account is 500P – $5,400. Initial equity was $15,000. Therefore, your rate of return after one year is as follows:(i) (500 × $44 – $5400) – $15,00015,000= .1067, or 10.67%.(ii) (500 × $40 – $5400) – $15,00015,000= –.0267, or –2.67%.(iii) (500 × $36 – $5400) – $15,00015,000= –.160, or –16.0%.The relationship between the percentage change in the price of Intel and investor’s percentage return is given by:% gain = % change in price x Total investment investor's initial equity – 8% x Funds borrowed Initial net worthFor example, when the stock price rises from 40 to 44, the percentage change in price is 10%, while the percentage gain for the investor is10% × 20,00015,000 – 8% × 500015,000 = 10.67%e. The value of the 500 shares is 500P. Equity is 500P – 5,400. You will receive a margin call when500P – 5400500P= .25 or when P = $14.4010. a)The gain or loss on the short position is –500 x ∆P. Invested funds are $15,000.Therefore the rate of return = (-500 x ∆P)/15,000. The returns in each of the threescenarios are:(i) (-500 x 4)/15000 = -13.3%(ii) (-500 x 0)/15000 = 0%(iii) (-500 x (–4))/15000 = 13.3%b)Total assets in the margin account are $20,000 (from the sale of stock) plus $15,000(the initial margin) = $35,000. Liabilities are 500P (the price of buying back theshares). A margin call will be issued when:(20,000 + 15,000 – 500P)/500P = 0.25 or P=$56c)With a $1 dividend, the short position must also pay $1 per share or $500 ($1 x 500)on the borrowed shares. The rate of return will be (-500 x ∆P – 500)/15,000.(i) [(-500 x 4) – 500]/15000 = -16.7%(ii) [(-500 x 0) – 500]/15000 = -3.33%(iii) [(-500 x (–4)) – 500]/15000 = 10.0%Liabilities are now (500P + 500). A margin call will be issued when:(20,000 + 15,000 – 500P - 500)/500P = 0.25 or P=$55.2013. a)55 ½ b)55 ¼ c)The trade will not be executed since the price on the limit sell order is higher than the quotedbid price (and the quoted ask price). d) In a purely dealer market, the trade will not be executed since the price on the limit buy orderis lower than the quoted ask price and all buy orders must be executed against the dealer’s ask quote.However, even on the Nasdaq market, customer limit orders now get priority over dealerquotes when they offer a better price than the quotes. In addition, the order could besubmitted to an ECN where it would set the inside quote. As a result, the Nasdaq dealermarket is looking more and more like an exchange market (see 14(b) below). Since this limitbuy order is offering to pay a higher price than the dealer (whose bid quote is 55¼), the limitorder would be executed against the next incoming market sell order.14. a) There can be price improvement for the two market orders. Brokers for each of themarket orders (i.e., the buy and the sell orders) can agree to do a trade inside thequoted spread. For example, they can trade at $55 3/8, thus improving the price forboth customers by $1/8 relative to the quoted bid and ask prices. The buyer gets thestock for $1/8 less than the quoted ask price and the seller receives $1/8 more for thestock than the quoted bid price.b) Whereas the limit buy order at $55 3/8 would not be executed in a purely dealer market(since the ask price is $55 ½), it could be executed in an exchange market. A brokerfor another customer with an order to sell at the market price would view the limitbuy order as the best bid price. The two brokers could agree to the trade and bring itto the specialist who would then execute the trade.19. d) Your order will be triggered at a price of $55. However, when the stock price dropsbelow your stop-loss price of $55, your stop-loss order immediately becomes amarket order and is executed at the prevailing market price. Thus, you could get $55per share, but you could also get a little bit more or a little bit less.。
Essentials Of Investments 8th Ed Bodie 投资学精要(第八版)课后习题答案chap04
CHAPTER 04 MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES 1.Mutual funds offer many benefits. Some of those benefits include the ability to investwith small amounts of money, diversification, professional management, lowtransaction costs, tax benefits, and reduce administrative functions.2.Close-end funds trade on the open market and are thus subject to market pricing. Open-end funds, are sold by the mutual fund and must reflect the NAV of the investments.3.Annual fees charged by a mutual fund to pay for marketing and distribution costs.4. A unit investment trust is an unmanaged mutual fund. Its portfolio is fixed and does notchange due to asset trades, as does a close-end fund. .5.Exchange-traded funds can be traded during the day, just as the stocks they represent.They are most tax effective, in that they do not have as many distributions. They also have much lower transaction costs. They also do not require load charges, management fees, and minimum investment amounts.6.Hedge funds have much less regulation since they are part of private partnerships andfree from mist SEC regulation. They permit investors to take on many risks unavailable to mutual funds. Hedge funds, however, may require higher fees and provide lesstransparency to investors. This offers significant counter party risk and hedge fundinvestors need to be more careful about the firm the invest with.7.An open-end fund will have higher fees since they are actively marketing and managingtheir investor base. The fund is always looking for new investors. A unit investment trust need not spend too much time on such matters since investors find each other.8.Asset allocation funds may dramatically vary the proportions allocated to each marketin accord with the portfolio manager’s forecast of the r elative performance of eachsector. Hence, these funds are engaged in market timing and are not designed to be low-risk investment vehicles.9.a. A unit investment trusts offer low costs and stable portfolios. Since they do notchange their portfolio, the investor knows exactly what they own. They are better suited to sophisticated investors.b. Open-end mutual funds offer higher levels of service to investors. The investors donot have any administrative burdens and their money is actively managed. This is better suited for less knowledgeable investors.c. Individual securities offer the most sophisticated investors ultimate flexibility. Theyare able to save money since they are only charged the expenses they incur. Alldecisions are under the control of the investor.10. Open-end funds must honor redemptions and receive deposits from investors. This flowof money necessitates retaining cash. Close-end funds no longer take and receivemoney from investors. As such, they are free to be fully invested at all times.11. The offering price includes a 6% front-end load, or sales commission, meaning thatevery dollar paid results in only $0.94 going toward purchase of shares. Therefore: Offering price =06.0170.10$load 1NAV -=-= = $11.3812. NAV = offering price ⨯ (1 – load) = $12.30 ⨯ 0.95 = $11.6913. HW14. Value of stocks sold and replaced = $15,000,000Turnover rate = 000,000,42$000,000,15$= 0.357 = 35.7%15.a. NAV =million5million 3$million 200$-= $39.40b. Premium (or discount) = NAV NAV ice Pr - = 40.39$40.39$36$-= –0.086 = -8.6% The fund sells at an 8.6% discount from NAV16. Rate of return = NAV year of Start ons Distributi )NAV (+∆ = 50.12$50.1$40.0$+-= 0.0880 = 8.80%17.HW18.Assume a hypothetical investment of $100.Loaded upa. Year 1 = 100 x (1+.06-.0175) = 104.25b. Year 3 = 100 x (1+.06-.0175)^3 = 116.30c. Year 10 = 100 x (1+.06-.0175)^10 = 151.62Economy funda. Year 1 = 100 x .98 x (1+.06-.0025) = 103.64b. Year 3 = 100 x .98 x (1+.06-.0025) ^ 3 = 115.90c. Year 10 = 100 x .98 x (1+.06-.0025) ^ 10 = 171.4119.NAVa. (450,000,000 – 10,000,000) / 44,000,000 = $10 per shareb. (440,000,000 – 10,000,000) / 43,000,000 = $10 per share20.a.Empirical research indicates that past performance of mutual funds is not highlypredictive of future performance, especially for better-performing funds. Whilethere may be some tendency for the fund to be an above average performer nextyear, it is unlikely to once again be a top 10% performer.b.On the other hand, the evidence is more suggestive of a tendency for poorperformance to persist. This tendency is probably related to fund costs andturnover rates. Thus if the fund is among the poorest performers, investorswould be concerned that the poor performance will persist.21. Start of year NAV = $20Dividends per share = $0.20End of year NAV is based on the 8% price gain, less the 1% 12b-1 fee:End of year NAV = $20 ⨯ 1.08 ⨯ (1 – 0.01) = $21.384 Rate of return =20$20.0$20$384.21$+-= 0.0792 = 7.92%22. The excess of purchases over sales must be due to new inflows into the fund. Therefore,$400 million of stock previously held by the fund was replaced by new holdings. So turnover is: $400/$2,200 = 0.182 = 18.2%23. Fees paid to investment managers were: 0.007 ⨯ $2.2 billion = $15.4 millionSince the total expense ratio was 1.1% and the management fee was 0.7%, we conclude that 0.4% must be for other expenses. Therefore, other administrative expenses were: 0.004 ⨯ $2.2 billion = $8.8 million24. As an initial approximation, your return equals the return on the shares minus the totalof the expense ratio and purchase costs: 12% - 1.2% - 4% = 6.8%But the precise return is less than this because the 4% load is paid up front, not at the end of the year.To purchase the shares, you would have had to invest: $20,000/(1 - 0.04) = $20,833The shares increase in value from $20,000 to: $20,000 ⨯ (1.12 - 0.012) = $22,160 The rate of return is: ($22,160 - $20,833)/$20,833 = 6.37%25. Suppose you have $1000 to invest. The initial investment in Class A shares is $940 netof the front-end load. After 4 years, your portfolio will be worth:$940 ⨯ (1.10)4 = $1,376.25Class B shares allow you to invest the full $1,000, but your investmentperformance net of 12b-1 fees will be only 9.5%, and you will pay a 1% back-endload fee if you sell after 4 years. Your portfolio value after 4 years will be:$1,000 ⨯ (1.095)4 = $1,437.66After paying the back-end load fee, your portfolio value will be:$1,437.66 ⨯ 0.99 = $1,423.28Class B shares are the better choice if your horizon is 4 years. With a 15-year horizon, the Class A shares will be worth:$940 ⨯ (1.10)15 = $3,926.61For the Class B shares, there is no back-end load in this case since the horizon is greater than 5 years. Therefore, the value of the Class B shares will be:$1,000 ⨯ (1.095)15 = $3,901.32At this longer horizon, Class B shares are no longer the better choice. The effect of Class B's 0.5% 12b-1 fees cumulates over time and finally overwhelms the 6% load charged to Class A investors.26. For the bond fund, the fraction of portfolio income given up to fees is:%0.4%6.0= 0.150 = 15.0%For the equity fund, the fraction of investment earnings given up to fees is:%0.12%6.0= 0.050 = 5.0%Fees are a much higher fraction of expected earnings for the bond fund, and therefore may be a more important factor in selecting the bond fund. This may help to explain why unmanaged unit investment trusts are concentrated inthe fixed income market. The advantages of unit investment trusts are low turnover and low trading costs and management fees. This is a more important concern to bond-market investors.27.a. After two years, each dollar invested in a fund with a 4% load and a portfolioreturn equal to r will grow to:$0.96 ⨯ (1 + r – 0.005)2Each dollar invested in the bank CD will grow to:$1 ⨯ (1.06)2If the mutual fund is to be the better investment, then the portfolio return, r,must satisfy:0.96 ⨯ (1 + r – 0.005)2 > (1.06)20.96 ⨯ (1 + r – 0.005)2 > 1.1236(1 + r – 0.005)2 > 1.1704 1 + r – 0.005 > 1.08191 + r > 1.0869Therefore, r > 0.0869 = 8.69%b.If you invest for six years, then the portfolio return must satisfy:0.96 ⨯ (1 + r – 0.005)6 > (1.06)6 = 1.4185(1 + r – 0.005)6 > 1.47761 + r – 0.005 > 1.06721 + r > 1.0722r > 7.22%The cutoff rate of return is lower for the six year investment because the "fixedcost" (i.e., the one-time front-end load) is spread out over a greater number ofyears.c.With a 12b-1 fee instead of a front-end load, the portfolio must earn a rate ofreturn (r) that satisfies:1 + r – 0.005 – 0.0075 > 1.06In this case, r must exceed 7.25% regardless of the investment horizon.28.The turnover rate is 50%. This means that, on average, 50% of the portfolio is sold andreplaced with other securities each year. Trading costs on the sell orders are 0.4%; and the buy orders to replace those securities entail another 0.4% in trading costs. Total trading costs will reduce portfolio returns by: 2 ⨯ 0.4% ⨯ 0.50 = 0.4%29.Suppose that finishing in the top half of all portfolio managers is purely luck, and thatthe probability of doing so in any year is exactly ½. Then the probability that anyparticular manager would finish in the top half of the sample five years in a row is (½)5 = 1/32. We would then expect to find that [350 ⨯ (1/32)] = 11 managers finish in the top half for each of the five consecutive years. This is precisely what we found. Thus, we should not conclude that the consistent performance after five years is proof of skill.We would expect to find eleven managers exhibiting precisely this level of"consistency" even if performance is due solely to luck.。
投资学第7版TestBank答案08
投资学第7版TestBank答案08Multiple Choice Questions1. As diversification increases, the total variance of a portfolio approaches ____________.A) 0B) 1C) the variance of the market portfolioD) infinityE) none of the aboveAnswer: C Difficulty: EasyRationale: As more and more securities are added to the portfolio, unsystematic riskdecreases and most of the remaining risk is systematic, as measured by the variance of the market portfolio.2. The index model was first suggested by ____________.A) GrahamB) MarkowitzC) MillerD) SharpeE) none of the aboveAnswer: D Difficulty: EasyRationale: William Sharpe, building on the work of Harry Markowitz, developed theindex model.3. A single-index model uses __________ as a proxy for the systematic risk factor.A) a market index, such as the S&P 500B) the current account deficitC) the growth rate in GNPD) the unemployment rateE) none of the aboveAnswer: A Difficulty: EasyRationale: The single-index model uses a market index, such as the S&P 500, as a proxy for the market, and thus for systematic risk.4. The Security Risk Evaluation book published by Merrill Lynch relies on the__________ most recent monthly observations to calculate regression parameters.A) 12B) 36C) 60D) 120E) none of the aboveAnswer: C Difficulty: EasyRationale: Most published betas and other regression parameters, including thosepublished by Merrill Lynch, are based on five years of monthly return data.5. The Security Risk Evaluation book published by Merrill Lynch uses the __________ asa proxy for the market portfolio.A) Dow Jones Industrial AverageB) Dow Jones Transportation AverageC) S&P 500 IndexD) Wilshire 5000E) none of the aboveAnswer: C Difficulty: EasyRationale: The Merrill Lynch data (and much of the otherpublished data sets) are based on the S&P 500 index as a market proxy.6. According to the index model, covariances among security pairs areA) due to the influence of a single common factor represented by the market indexreturnB) extremely difficult to calculateC) related to industry-specific eventsD) usually positiveE) A and DAnswer: E Difficulty: EasyRationale: Most securities move together most of the time, and move with a market index, or market proxy.7. The intercept calculated by Merrill Lynch in the regression equations is equal toA) α in the CAPMB) α + r f(1 + β)C) α + r f(1 - β)D) 1 - αE) none of the aboveAnswer: C Difficulty: ModerateRationale: The intercept that Merrill Lynch calls alpha is really, using the parameters of the CAPM, an estimate of a + rf (1 - b). The apparent justification for this procedure is that, on a monthly basis, rf(1 - b) is small and is apt to be swamped by the volatility of actual stock returns.8. Analysts may use regression analysis to estimate the index model for a stock. Whendoing so, the slope of the regression line is an estimate of______________.A) the α of the assetB) the β of the assetC) the σ of the assetD) the δ of the assetE) none of the aboveAnswer: B Difficulty: ModerateRationale: The slope of the regression line, b, measures the volatility of the stock versus the volatility of the market.9. In a factor model, the return on a stock in a particular period will be related to_________.A) firm-specific eventsB) macroeconomic eventsC) the error termD) both A and BE) neither A nor BAnswer: D Difficulty: ModerateRationale: The return on a stock is related to both firm-specific and macroeconomic events.10. Rosenberg and Guy found that __________ helped to predict a firm's beta.A) the firm's financial characteristicsB) the firm's industry groupC) firm sizeD) both A and BE) A, B and C all helped to predict betas.Answer: E Difficulty: ModerateRationale: Rosenberg and Guy found that after controlling for the firm's financialcharacteristics, the firm's industry group was a significant predictor of the firm's beta.11. If the index model is valid, _________ would be helpful in determining the covariancebetween assets K and L.A) βkB) βLC) σMD) all of the aboveE) none of the aboveAnswer: D Difficulty: ModerateRationale: If the index model is valid A, B, and C are determinants of the covariance between K and L.12. Rosenberg and Guy found that ___________ helped to predict firms' betas.A) debt/asset ratiosB) market capitalizationC) variance of earningsD) all of the aboveE) none of the aboveAnswer: D Difficulty: ModerateRationale: Rosenberg and Guy found that A, B, and C were determinants of firms' betas.13. If a firm's beta was calculated as 0.6 in a regression equation, Merrill Lynch would statethe adjusted beta at a numberA) less than 0.6 but greater than zero.B) between 0.6 and 1.0.C) between 1.0 and 1.6.D) greater than 1.6.E) zero or less.Answer: B Difficulty: ModerateRationale: Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are less than 1, adjusted betas are between 1 and the calculated beta.14. The beta of Exxon stock has been estimated as 1.2 by Merrill Lynch using regressionanalysis on a sample of historical returns. The Merrill Lynch adjusted beta of Exxon stock would be ___________.A) 1.20B) 1.32C) 1.13D) 1.0E) none of the aboveAnswer: C Difficulty: ModerateRationale: Adjusted beta = 2/3 sample beta + 1/3(1); = 2/3(1.2) + 1/3 = 1.13.15. Assume that stock market returns do not resemble a single-index structure. Aninvestment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.A) 100, 100B) 100, 4950C) 4950, 100D) 4950, 4950E) none of the aboveAnswer: A Difficulty: ModerateRationale: The expected returns of each of the 100 securitiesmust be calculated. In addition, the 100 variances around these returns must be calculated.16. Assume that stock market returns do not resemble a single-index structure. Aninvestment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate ____________ covariances.A) 45B) 100C) 4,950D) 10,000E) none of the aboveAnswer: C Difficulty: ModerateRationale: (n2 - n)/2 = (10,000 - 100)/2 = 4,950 covariances must be calculated.17. Assume that stock market returns do follow a single-index structure. An investmentfund analyzes 200 stocks in order to construct a mean-variance efficient portfolioconstrained by 200 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to themacroeconomic factor.A) 200; 19,900B) 200; 200C) 19,900; 200D) 19,900; 19.900E) none of the aboveAnswer: B Difficulty: ModerateRationale: For a single-index model, n(200), expected returnsand n(200) sensitivity coefficients to the macroeconomic factor must be estimated.18. Assume that stock market returns do follow a single-index structure. An investmentfund analyzes 500 stocks in order to construct a mean-variance efficient portfolioconstrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimates for the variance of the macroeconomic factor.A) 500; 1B) 500; 500C) 124,750; 1D) 124,750; 500E) 250,000; 500Answer: A Difficulty: ModerateRationale: For the single-index model, n(500) estimates of firm-specific variances must be calculated and 1 estimate for the variance of the common macroeconomic factor.19. Consider the single-index model. The alpha of a stock is 0%. The return on the marketindex is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stockper formance. The β of the stock is _______.A) 0.67B) 0.75C) 1.0D) 1.33E) 1.50Answer: C Difficulty: ModerateRationale: 11% = 0% + b(11%); b = 1.0.20. Suppose you held a well-diversified portfolio with a very large number of securities,and that the sin gle index model holds. If the ó of your portfolio was 0.20 and óM was0.16, the β of the portfolio would be approximately ________.A) 0.64B) 0.80C) 1.25D) 1.56E) none of the aboveAnswer: C Difficulty: DifficultRationale: s2p / s2m = b2; (0.2)2/(0.16)2 = 1.56; b = 1.25.21. Suppose the following equation best describes the evolution of β over time:βt= 0.25 + 0.75βt-1If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.A) 0.45B) 0.60C) 0.70D) 0.75E) none of the aboveAnswer: C Difficulty: EasyRationale: 0.25 + 0.75(0.6) = 0.70.22. Merrill Lynch estimates the index model for a stock using regression analysis involvingtotal returns. They estimated the intercept in the regression equation at 6% and the β at0.5. The risk-free rate of return is 12%. The true β of the stockis ________.A) 0%B) 3%C) 6%D) 9%E) none of the aboveAnswer: A Difficulty: DifficultRationale: 6% = a + 12% (1 - 0.5); a = 0%.23. The index model for stock A has been estimated with the following result:R A = 0.01 + 0.9R M + e AIf σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is _________.A) 0.2025B) 0.2500C) 0.4500D) 0.8100E) none of the aboveAnswer: C Difficulty: DifficultRationale: R2 = b2s2M / s2;0.25 = [(0.81)(0.25)2]/s2; s = 0.4500.24. The index model for stock B has been estimated with the following result:R B = 0.01 + 1.1R M + e BIf σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is_________.A) 0.1111B) 0.2111C) 0.3111D) 0.4111E) none of the aboveAnswer: C Difficulty: DifficultRationale: R2 = b2s2M / s2; 0.5 = [(1.1)2(0.2)2]/s2; s = 0.3111.25. Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%. The unadjusted β of Mobil stock is 1.30. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you useMerrill Lynch adjusted betas.A) 15.0%B) 15.5%C) 16.0%D) 16.8%E) none of the aboveAnswer: D Difficulty: DifficultRationale: Adjusted beta = 2/3(1.3) + 1/3 = 1.20; E(rM) = 6% + 1.20(9%) = 16.8%. 26. The index model has been estimated for stocks A and B with the following results:R A = 0.01 + 0.5R M + e AR B = 0.02 + 1.3R M + e BσM= 0.25 σ(e A)= 0.20 σ(e B) = 0.10The covariance between the returns on stocks A and B is ___________.A) 0.0384B) 0.0406C) 0.1920D) 0.0050E) 0.4000Answer: B Difficulty: DifficultRationale: Cov(RA,RB) = bAbBs2M = 0.5(1.3)(0.25)2 = 0.0406.27. The index model has been estimated for stocks A and B with the following results:R A = 0.01 + 0.8R M + e AR B = 0.02 + 1.2R M + e BσM= 0.20 σ(e A) = 0.20 σ (e B) = 0.10The standard deviation for stock A is __________.A) 0.0656B) 0.0676C) 0.2561D) 0.2600E) none of the aboveAnswer: C Difficulty: DifficultRationale: σA = [(0.8)2(0.2)2 + (0.2)2]1/2 = 0.2561.28. The index model has been estimated for stock A with the following results:R A = 0.01 + 0.8R M + e AσM= 0.20 σ(e A) = 0.10The standard deviation of the return for stock A is __________.A) 0.0356B) 0.1886C) 0.1600D) 0.6400E) none of the aboveAnswer: B Difficulty: DifficultRationale: σB = [(.8)2(0.2)2 + (0.1)2]1/2 = 0.1886.29. Security returnsA) are based on both macro events and firm-specific events.B) are based on firm-specific events only.C) are usually positively correlated with each other.D) A and B.E) A and C.Answer: E Difficulty: EasyRationale: Stock returns are usually highly positively correlated with each other. Stock returns are affected by both macro economic events and firm-specific events.30. The single-index modelA) greatly reduces the number of required calculations, relative to those required by theMarkowitz model.B) enhances the understanding of systematic versus nonsystematic risk.C) greatly increases the number of required calculations, relative to those required bythe Markowitz model.D) A and B.E) B and C.Answer: D Difficulty: EasyRationale: The single index model both greatly reduces the number of calculations and enhances the understanding of the relationship between systematic and unsystematic risk on security returns.31. The Security Characteristic Line (SCL)A) plots the excess return on a security as a function of the excess return on the market.B) allows one to estimate the beta of the security.C) allows one to estimate the alpha of the security.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: The security characteristic line, which plots the excess return of the security as a function of the excess return of the market allows one to estimate both the alpha and the beta of the security.32. The expected impact of unanticipated macroeconomic events on a security's returnduring the period isA) included in the security's expected return.B) zero.C) equal to the risk free rate.D) proportional to the firm's beta.E) infinite.Answer: B Difficulty: ModerateRationale: The expected value of unanticipated macroeconomic events is zero, because by definition it must average to zero or it would be incorporated into the expected return.33. Covariances between security returns tend to beA) positive because of SEC regulations.B) positive because of Exchange regulations.C) positive because of economic forces that affect many firms.D) negative because of SEC regulationsE) negative because of economic forces that affect many firms.Answer: C Difficulty: ModerateRationale: Economic forces such as business cycles, interest rates, and technological changes tend to have similar impacts on many firms.34. In the single-index model represented by the equation ri = E(r i) + βi F + e i, the term e irepresentsA) the impact of unanticipated macroeconomic events on security i's return.B) the impact of unanticipated firm-specific events on security i's return.C) the impact of anticipated macroeconomic events on security i's return.D) the impact of anticipated firm-specific events on security i's return.E) the impact of changes in the market on security i's return.Answer: B Difficulty: ModerateRationale: The textbook discusses a model in which macroeconomic events are used asa single index for security returns. The e i term represents the impact of unanticipatedfirm-specific events. The e i term has an expected value of zero. Only unanticipated events would affect the return.35. Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE.Using a single-index model rather than the Markowitz model _______ the number of inputs needed from _______ to ________.A) increases, about 1,400, more than 1.4 millionB) increases, about 10,000, more than 125,000C) reduces, more than 125,000, about 10,000D) reduces, more than 4 million, about 9,000E) increases, about 150, more than 1,500Answer: D Difficulty: ModerateRationale: This example is discussed in the textbook. The main point for the students to remember is that the single-indexmodel drastically reduces the number of inputsrequired.36. One “cost” of the single-index model is that itA) is virtually impossible to apply.B) prohibits specialization of efforts within the security analysis industry.C) requires forecasts of the money supply.D) is legally prohibited by the SEC.E) allows for only two kinds of risk -- macro risk and micro risk.Answer: E Difficulty: ModerateRationale: The single-index model discussed in chapter 10 broke risk into macro and micro portions. In this model other factors such as industry effects.37. The Security Characteristic Line (SCL) associated with the single-index model is a plotofA) the security's returns on the vertical axis and the market index's returns on thehorizontal axis.B) the market index's returns on the vertical axis and the security's returns on thehorizontal axis.C) the security's excess returns on the vertical axis and the market index's excessreturns on the horizontal axis.D) the market index's excess returns on the vertical axis and the security's excessreturns on the horizontal axis.E) the security's returns on the vertical axis and Beta on thehorizontal axis.Answer: C Difficulty: ModerateRationale: The student needs to remember that it is the excess returns that are plotted and that the security's returns are plotted as a dependent variable.38. The idea that there is a limit to the reduction of portfolio risk due to diversification isA) contradicted by both the CAPM and the single-index model.B) contradicted by the CAPM.C) contradicted by the single-index model.D) supported in theory, but not supported empirically.E) supported both in theory and by empirical evidence.Answer: E Difficulty: ModerateRationale: The benefits of diversification are limited to the level of systematic risk.Figure 8.1 shows this concept graphically.39. In their study about predicting beta coefficients, which of the following did Rosenbergand Guy find to be factors that influence beta?I)industry groupII)variance of cash flowIII)dividend yieldIV)growth in earnings per shareA) I and IIB) I and IIIC) I, II, and IIID) I, II, and IVE) I, II, III, and IVAnswer: E Difficulty: ModerateRationale: All of the factors mentioned, as well as variance of earnings, firm size, and debt-to-asset ratio, were found to help predict betas.40. If a firm's beta was calculated as 1.6 in a regression equation, Merrill Lynch would statethe adjusted beta at a numberA) less than 0.6 but greater than zero.B) between 0.6 and 1.0.C) between 1.0 and 1.6.D) greater than 1.6.E) zero or less.Answer: C Difficulty: ModerateRationale: Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are more than 1, adjusted betas are between 1 and the calculated beta.41. The beta of a stock has been estimated as 1.8 by Merrill Lynch using regression analysison a sample of historical returns. The Merrill Lynch adjusted beta of the stock would be ___________.A) 1.20B) 1.53C) 1.13D) 1.0E) none of the aboveAnswer: B Difficulty: ModerateRationale: Adjusted beta = 2/3 sample beta + 1/3(1); = 2/3(1.8) + 1/3 = 1.53.42. Assume that stock market returns do not resemble a single-index structure. Aninvestment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.A) 100, 100B) 40, 40C) 4950, 100D) 4950, 4950E) none of the aboveAnswer: B Difficulty: ModerateRationale: The expected returns of each of the 40 securities must be calculated. In addition, the 40 variances around these returns must be calculated.43. Assume that stock market returns do not resemble a single-index structure. Aninvestment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate ____________ covariances.A) 45B) 780C) 4,950D) 10,000E) none of the aboveAnswer: B Difficulty: ModerateRationale: (n2 - n)/2 = (1,600 - 40)/2 = 780 covariances must be calculated.44. Assume that stock market returns do follow a single-index structure. An investmentfund analyzes 60 stocks in order to construct a mean-variance efficient portfolioconstrained by 60 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to themacroeconomic factor.A) 200; 19,900B) 200; 200C) 60; 60D) 19,900; 19.900E) none of the aboveAnswer: C Difficulty: ModerateRationale: For a single-index model, n(60), expected returns and n(60) sensitivity coefficients to the macroeconomic factor must be estimated.45. Consider the single-index model. The alpha of a stock is 0%. The return on the marketindex is 10%. The risk-free rate of return is 3%. The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stockperformance. The β of the stock is _______.A) 0.64B) 0.75C) 1.17D) 1.33E) 1.50Answer: A Difficulty: ModerateRationale: 7% = 0% + b(11%); b = 0.636.46. Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds. If the σ of your portfolio was 0.25 and σM was0.21, the β of the portfolio would be approximately ________.A) 0.64B) 1.19C) 1.25D) 1.56E) none of the aboveAnswer: B Difficulty: DifficultRationale: s2p / s2m = b2; (0.25)2/(0.21)2 = 1.417; b = 1.19.47. Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds. If the σ of your portfolio was 0.18 and σM was0.22, the β of the portfoli o would be approximately ________.A) 0.64B) 1.19C) 0.82D) 1.56E) none of the aboveAnswer: C Difficulty: DifficultRationale: s2p / s2m = b2; (0.18)2/(0.22)2 = 0.669; b = 0.82.48. Suppose the following equation best describes the evolution of β over time:at = 0.4 + 0.6βt-1If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.A) 0.45B) 0.60C) 0.70D) 0.94E) none of the aboveAnswer: D Difficulty: EasyRationale: 0.4 + 0.6(0.9) = 0.94.49. Suppose the following equation best describes the evolution of β over time:β t= 0.3 + 0.2βt-1If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year.A) 0.46B) 0.60C) 0.70D) 0.94E) none of the aboveAnswer: A Difficulty: EasyRationale: 0.3 + 0.2(0.8) = 0.46.50. The index model for stock A has been estimated with the following result:R A = 0.01 + 0.94R M + e AIf σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is _________.A) 0.2025B) 0.2500C) 0.4500D) 0.5329E) none of the aboveAnswer: D Difficulty: DifficultRationale: R2 = b2s2M / s2; 0.28 = [(0.94) 2(0.30) 2] / .28; s = 0.5329.51. 30. A reasonable forecast of the return on Mobil stock for the coming year is_________ if you use Merrill Lynch adjusted betas.A) 15.0%B) 15.5%C) 16.0%D) 14.6%E) none of the aboveAnswer: D Difficulty: DifficultRationale: Adjusted beta = 2/3(1.5) + 1/3 = 1.33; E(rM) = 4% + 1.33(8%) = 14.6%. 52. The index model has been estimated for stocks A and B with the following results:R A = 0.01 + 0.8R M + e AR B = 0.02 + 1.1R M + e BσM= 0.30 σ (e A) = 0.20 σ (e B) = 0.10The covariance between the returns on stocks A and B is ___________.A) 0.0384B) 0.0406C) 0.1920D) 0.0050E) 0.0792Answer: E Difficulty: DifficultRationale: Cov(RA,RB) = bAbBs2M = 0.8(1.1)(0.30)2 = 0.0792.53. If a firm's beta was calculated as 1.35 in a regression equation, Merrill Lynch wouldstate the adjusted beta at a numberA) less than 1.35B) between 0.0 and 1.0.C) between 1.0 and 1.35.D) greater than 1.35.E) zero or less.Answer: C Difficulty: ModerateRationale: Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are less than 1, adjusted betas are between 1 and the calculated beta.54. The beta of a stock has been estimated as 1.4 by Merrill Lynch using regression analysison a sample of historical returns. The Merrill Lynch adjusted beta of the stock would be ___________.A) 1.27B) 1.32C) 1.13D) 1.0E) none of the aboveAnswer: A Difficulty: ModerateRationale: Adjusted beta = 2/3 sample beta + 1/3(1); = 2/3(1.4) + 1/3 = 1.27.55. The beta of a stock has been estimated as 0.85 by Merrill Lynch using regressionanalysis on a sample of historical returns. The Merrill Lynch adjusted beta of the stock would be ___________.A) 1.01B) 0.95C) 1.13D) 0.90E) none of the aboveAnswer: D Difficulty: ModerateRationale: Adjusted beta = 2/3 sample beta + 1/3(1); = 2/3(0.85) + 1/3 = 0.90.56. Assume that stock market returns do not resemble a single-index structure. Aninvestment fund analyzes 125 stocks in order to construct amean-variance efficient portfolio constrained by 125 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.A) 125, 125B) 125, 15,625C) 15,625, 125D) 15,625, 15,625E) none of the aboveAnswer: A Difficulty: ModerateRationale: The expected returns of each of the 125 securities must be calculated. In addition, the 125 variances around these returns must be calculated.。
投资学精要博迪第八版课后答案Chapter2
投资学精要博迪第八版课后答案Chapter2CHAPTER 02 ASSET CLASSES AND FINANCIAL INSTRUMENTS /doc/3f4673862.html,mon stock is an ownership share in a publicly held corporation. Common shareholders have voting rights and may receive dividends. Preferred stockrepresents nonvoting shares in a corporation, usually paying a fixed stream ofdividends. While corporate bonds are long-term debt by corporations, typically paying semi-annual coupons and returning the face value of the bond at maturity.2.While the DJIA has 30 large corporations in the index, it does not represent theoverall market nearly as well as the 500 stocks contained in The Wilshire index.The DJIA is simply too small.3.They are short term, very safe, and highly liquid. Also, their unit value almostnever changes.4.Treasury bills, certificates of d eposit, commercial paper, bankers’ acceptances,Eurodollars, repos, reserves, federal funds and brokers’ calls.5.American Depository Receipts, or ADRs, are certificates traded in U.S. marketsthat represent ownership in shares of a foreign company. Investors may alsopurchase shares of foreign companies on foreign exchanges. Lastly, investors may use international mutual funds to own shares indirectly.6.Because they produce coupons that are tax free.7.The fed funds rate is simply the rate of interest on very short-term loans amongfinancial institutions. The London Interbank Offer Rate (LIBOR) is the rate atwhich large banks in London are willing to lend money among themselves.8.General obligation bonds are backed by the local governments, while revenuebonds have proceeds attached to specific projects. A revenue bond has lessguarantees, therefore, it is riskier and will have a higher yield.9.Corporations may exclude 70% of dividends received from domestic corporationsin the computation of their taxable income.10.Limited liability means that the most shareholders can lose in event of the failureof the corporation is their original investment.11.Money market securities are referred to as “cash equivalents” because of theirgreat liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very lowtransaction costs.12.Taxable equivalent yield = .0675 / (1-.35) = .103813.a.The taxable bond. With a zero tax bracket, the after-tax yield for thetaxable bond is the same as the before-tax yield (5%), which is greaterthan the yield on the municipal bond.b.The taxable bond. The after-tax yield for the taxable bond is:0.05 x (1 – 0.10) = 4.5%c.You are indifferent. The after-tax yield for the taxable bond is:0.05 x (1 – 0.20) = 4.0%The after-tax yield is the same as that of the municipal bond.d.The municipal bond offers the higher after-tax yield for investors in taxbrackets above 20%.14.The after-tax yield on the corporate bonds is: [0.09 x (1 –0.30)] = 0.0630 =6.30%. Therefore, the municipals must offer at least 6.30% yields.15.The equivalent taxable yield (r) is: r = rm/(1 – t)a. 4.00%b. 4.44%c. 5.00%d. 5.71%16.a.You would have to pay the asked price of:107:27 = 107.8438% of par = $1,074.438b.The coupon rate is 4.875%, implying coupon payments of $48.75 annuallyor, more precisely, $24.375 semiannually.c.Current yield = Annual coupon income/price =4.875/107.8438= 0.0452 = 4.52%17.a.The closing price today is $74.92, which is $1.82 belowyesterday’s price.Therefore, yesterday’s closing price was: $74.92 + $1.82 = $76.74b.You could buy: $5,000/$74.92 = 66.74 sharesc.Your annual dividend income would be 1.90 % of $5,000, or $95.d.Earnings per share can be derived from the price-earnings (PE) ratio.Price/Earnings = 13 and Price = $74.92 so that Earnings = $74.92/13 =$5.763118.a.At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.3333 The rate of return is: (83.3333/80) – 1 = 4.167%b.In the absence of a split, stock C would sell for 110, and the value of theindex would be: (95 + 45 + 110)/3 = 83.3333After the split, stock C sells at 55. Therefore, we need to set the divisor (d)such that:83.3333 = (95 + 45 + 55)/d…..d = 2.340c.The rate of return is zero. The index remains unchanged, as it should,since the return on each stock separately equals zero.19.a.Total market value at t = 0 is: (9,000 + 10,000 + 20,000) = 39,000Total market value at t = 1 is: (9,500 + 9,000 + 22,000) = 40,500Rate of return = (40,500/39,000) – 1 = 3.85%b.The return on each stock is as follows:R a = (95/90) – 1 = 0.0556R b = (45/50) – 1 = –0.10R c = (110/100) – 1 = 0.10The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 =0.0185 = 1.85%20.The fund would require constant readjustment since every change in the price of astock would bring the fund asset allocation out of balance.21.It would increase by 19 points. (60 – 3) / 3 = 1922.Price3.4% x (87/360) = 0.8217% or a $ price of $10,000 x (1-.008217) = $9,917.83Equivalent Yield10,000 / 9,9917.83 = 1.0083 x 365/87 = 4.23%23.a.The higher coupon bondb.The call with the lower exercise pricec.The put on the lower priced stock24.a.The December maturity futures price is $5.116 per bushel. If the contractcloses at $5.25 per bushel in December, your profit / loss on each contract(for delivery of 5,000 bushels of corn) will be: ($5.25 - $5.116) x 5000 =$ 670 gain.b.There are 5114,099 contracts outstanding, representing 570,495,000bushels of corn.25.a.Yes. As long as the stock price at expiration exceeds the exercise price, itmakes sense to exercise the call.Gross profit is: $111 - $ 105 = $6Net profit = $6 – $ 22.40 = $16.40 lossRate of return = -16.40 / 22.40 = - .7321 or 73.21% lossb.Yes, exercise.Gross profit is: $111 - $ 100 = $11Net profit = $11 – $ 22.40 = $11.40 lossRate of return = -11.40 / 22.40 = 0.5089 or 50.89 % lossc. A put with exercise price $105 would expire worthless for any stock priceequal to or greater than $105. An investor in such a put would have a rateof return over the holding period of –100%.26.a.Long callb.Long putc.Short putd.Short call27.There is always a chance that the option will expire in the money. Investors willpay something for this chance of a positive payoff.28.Value of callInitial Cost Profitat expirationa. 0 4 -4b. 0 4 -4c. 0 4 -4d. 5 4 1e. 10 4 6Value of putInitial Cost Profitat expirationa. 10 6 4b. 5 6 -1c. 0 6 -6d. 0 6 -6e. 0 6 -629.The spread will widen. Deterioration of the economy increases credit risk, that is,the likelihood of default. Investors will demand a greater premium on debtsecurities subject to default risk.30.Eleven stocks have a 52 week high at least 150% above the 52 week low.Individual stocks are much more volatile than a group of stocks.31.The total before-tax income is $4. After the 70% exclusion, taxable income is:0.30 x $4 = $1.20Therefore:Taxes = 0.30 x $1.20 = $0.36After-tax income = $4 – $0.36 = $3.64After-tax rate of return = $3.64 / $40 = 9.10%32.A put option conveys the right to sell the underlying asset at the exercise price. Ashort position in a futures contract carries an obligation to sell the underlyingasset at the futures price.33.A call option conveys the right to buy the underlying asset at the exercise price.A long position in a futures contract carries an obligation to buy the underlyingasset at the futures price.CFA 1Answer: c。
投资学(Investment 8th)讲义1
Investment InstitutionsWhat are Investment institutions? Contractual savings institutions -Insurance companies -Pension fundsInvestment intermediaries -Mutual funds / unit trusts -Investment trusts -Hedge funds-Private equity company❝Investment institution is a financial intermediary (company) engaged in investing in, and managing, a portfolio of securities on behalf of their shareholders. ❝Indirect investment in capital/money marketinstruments via an investment institution is the most popular way for individuals to invest surplus funds ❝In the UK, 50 –60% of equities and bonds are held and managed by investment institutions ❝Benefits: diversified portfolio, professional managements❝All investment companies charge a fee (annual expense ratio) to shareholders to pay for theoperating costs and the management fee.❝Depositary institutions◦Intermediaries with a significant proportion of their funds derived from customer deposits, e.g. Building societies. Short-term liabilities.❝Contractual savings institutions◦Typically acquire funds at periodic intervals on a contractual basis❝Investment intermediaries◦Collective investment funds, Finance companies,Investment banks, Securities firms❝Two major groups: Insurance companies and Pension funds ❝Long-term liabilities❝Liquidity of their assets is less important than for depositary institutions –they can predict with greater accuracy their future payments due to customers❝Hence, they can invest a greater proportion of funds in long-term securities (bonds,equities)❝Primary objective is to protect policyholders (firms and individuals) from adverse events ❝Receive premiums from policyholders and promise compensation if specified events occur❝Two main segments: general insurance and life insurance❝Protection against personal injury and liabilities such as accidents, theft and fire❝Usually over a fixed time period e.g. 1 year ❝Claims usually made soon after the event so liabilities are mostly short term❝Hence they hold a greater proportion of liquid assets than life insurers. Holding financial assets might be viewed as a byproduct of the business.❝Some authors (e.g. B&T) do not view this category as an investment intermediary❝Protects the policyholder in the event of death, illness or retirement; hence long-term liabilities❝Term assurance, Whole-of-life policy, Endowment policy, Annuities❝Term assurance: provides insurance cover, for specifiedperiod, against the risk of death. If the insured survivesthe specified period then no payment is made.❝Whole-of-life policy pays a capital sum on the death ofthe person assured, whenever that event occurs.❝Endowment policy pays a capital sum at the end ofsome specified term or earlier if the assured dies withinthe term.-The premium for Whole-of-life and endowment policieswill be higher than for term assurance.❝Annuities: A policyholder pay an initial lump sumwhich used by the insurance company to providean agreed income until death.-The insurance company immediately creates a fund❝Risk: certain sums are guaranteed to be paid in thefuture and these sums exceed the value of thepremiums over the life of the contract.❝Match the term structure of its assets and liabilities❝Invest in long-term assets e.g. bonds, equities andmortgages.❝Provide retirement income (in the form ofannuities) to employees covered by a pension plan❝Personal scheme and public (state) scheme❝Funded scheme and unfunded (pay-as-you-go)scheme❝Funded scheme: Receive contributions fromemployers and/or employees and invest thesefunds in assets, including equities and bonds.Returns from the investment are used to paybenefits to members of the scheme.❝Two main types of funded scheme: defined benefit(DB) and defined contribution (DC)❝DB: the sponsor agrees to pay members ofthe scheme a pension equal to apredetermined percentage of their finalsalary (average salary), subject to themember‟s years of service❝DC: the return on the investmentsdetermines pension benefits❝Occupational schemes where the sponsor isthe employer have historically been DB,while private pensions are DC❝Risk: benefits to be paid are not known with certainty;inflation complications as it increases the benefits to bepaid by fund.❝Benefit from tax deferral: in the UK, contributions arenot taxable, pensioner pays income tax❝Pension fund trustees will determine the overallinvestment strategy❝They will often decide what proportion of assets to beheld in different asset classes❝Asset mix will be influenced by the maturity of the fund❝Long-term liabilities hence long-term assets❝Index-linked bonds, Equities❝Investment companies are classified, depending on whether their own capitalisation (number of shares outstanding) is constantly changing or fixed:-Open-end : capitalisation constantly changing; new investors buy additional shares from the company and some existing shareholders sell their shares back to the company.-Closed-end : fixed capitalization; share traded onexchange.open-ended❝Mutual funds / unit trusts❝Open-ended investment companies OEICsClosed ended❝Investment trusts ❝Hedge funds❝Private equity company❝Pool resources from many individuals andcompanies and invest these in a range of assets ❝Provide opportunities for small investors to investin a diversified fund at low cost❝Take advantage of lower transaction costs in trading larger blocks of securities❝Trusts in the legal sense; controlled and monitored by trustees; who act as guardian of the assets on behalf of the beneficial owners ❝Investment decisions❝When an investor buys a stake in a unit trust, he/she purchases a new unit in the fund (unless matched with a seller by the fund manager)❝Open-ended fund where the size of the fund can varyaccording to the number of contributors to the fund ❝Price of each unit reflects current value of the fund divided by the number of outstanding units❝All sales and purchases of units are made with the trust manager.❝Do not trade on stock exchange.❝Dual pricing structure: offer price (investors buy units)and bid price (investors sell units back to the trust)❝Annual management fee (usually 0.5 -1% of the funds under management), plus the bid-offer spread on buying and selling units❝Limited in the amount that can be invested in any single security❝Total return for a mutual fund includes reinvestment dividends and capital gain.❝A cumulative total return measures the actual performance over 3, 5 or 10 years.❝In Jan 2009, 8,000 domestic mutual funds withassets of $9.4 trillion in the US.❝Short-term funds:-Money market mutual funds ❝Long-term funds: -Capital market funds;-Equity (stock) funds, Bond funds or Hybrid(balanced) funds (hold combination of stocks and bonds)-Index funds: mutual funds holding an managed portfolio of bonds or stocks designed to match particular market index, such as S&P 500. Has low expenses ratio.❝OEICs operate similarly to a unit trust in the sense that they are open-ended❝But an OEIC has a company structure and can be listed on the stock exchange ❝Shares will reflect the value of the fund ❝Shares will have a single price (rather than the separate buying and selling prices indicated for unit trusts)❝Companies whose business is the investment of funds in financial assets.❝A closed-end fund, only able to raise more funds through rights issue shares or borrowing (bonds) ❝Not a trust in the legal sense; limited liability company with listed shares (traded in stock market).❝Investors can purchase ordinary shares of the ITC ❝A portfolio, managed by ITC‟s board of directors who determine the investment strategy❝Not faced with outflow of funds, so investment strategy does not depend on maintaining cash flows to meet future liabilities❝The existence of borrowed funds in the capitalstructure implies a …gearing effect‟ on the value of the ITC shares❝Net asset value (NAV) per share is the value of assetsless debt divided by number of issued shares-E.g. ITC capital structure: £8m in equities (4m shares) + £2m debt. Thus the NAV per share = £2-If the value of ITC asset portfolio were to doubled to £20m, then the NAV per would increase to £4.5 (£18m/4m shares)-A 100% in the value of assets held has led to an increase in the NAV per share of 125%❝The gearing effect is of benefit to shareholders in a rising stock market.❝The hedge funds are largely unregulated❝Reputation is as risky funds, shrouded by mystery and only accessible to the wealthy.❝According to IFSL, the number of hedge funds increased from 4,000 with $324bn of assets in 1999 to peak of 11,000 with $2,150bn in 2007, and then declined to 10,000 hedge funds and $1,500bn by the start of 2009. ❝There is no unique definition of hedge fund since it is an industry term rather than a legal term❝“Includes a multitude of skill -based investment strategies with a broad range of risk and returnobjectives. A common element is the use of investment and risk management skills to seek positive returns regardless of market direction.”❝A hedge fund is an actively managed investment fund ❝Seeks an attractive …absolute return‟, a return whether the market go up or down.❝Do not follow any benchmark, but rather just try to generate high returns (larger than ordinary available return) while managing risks, by exploiting various market opportunities❝Typical strategies include -Short selling,-Borrowing, Leverage -Use of derivatives❝Fees include a fixed fee and management fee e.g. 1-2% of assets plus 20-25% of upside performance.Hedge fundsMutual funds and pension fundsInvestment trusts FreedomLimitation on borrowing, short selling, and the use of derivatives May borrow Limitations on short selling, and the use of derivatives❝Typical investors◦Wealthy individuals ◦Pension funds◦Other hedge funds, creating …funds of hedge funds‟ –diversity in strategy and risk❝Returns and risk can vary a great deal among the different hedge fund strategies❝Market neutral (or relative value arbitrage) funds ◦Attempt to produce returns that have no or low correlation with e.g. equity markets◦Highly quantitative portfolio construction◦Concentrate on the relative value of individual shares, bonds, currencies ...◦Commonly apply arbitrage strategies-e.g. exploit mispricing between an underlying asset and a derivative instrument-Concentrate on the difference in performance of two given securities in homogenous universe. E.g. belief that BP will do better than X in oil firm; go long on BP and short on X.-Take position with convertible bonds❝Long/short funds-Generally invest in equity and bonds, taking directional bets on individual security or sector-Analyse individual companies and individual shares-Micro investors (look at individual/specific stocks)-Some may specialize in geographical sectors -Others may specialize in either small or large companies -E.g. 130/30-Timing is crucial-Stock-picking skill (short selling overpriced stocks and buying underpriced stocks)-Not automatically market neutral e.g. could havestrong positive correlation with equityGlobal (macro) asset funds-Look at stocks, bonds, currencies, and commodities from a global point of view -Macro-investors (look at broad themes) -Have positive exposure to the market-A fund might go long in sectors they believe will provide good returns, and short on countries they believe will have negative returns❝Event driven funds-Looks to exploit special situations -Take over bids-Merger, Corporate restructuring❝A group of individuals set up a limited liabilitypartnership, might have a limited life of around 10 years.❝Make good returns by buying public companies or neglected subsidiaries at good price and turning them into more attractive business❝They will gear up with debt that a public company would not want to risk.❝Normally be turned into non-quoted company❝They get involved in the business, bringing their own expertise and give managers big incentives to improve the business❝They seek cut costs, squeeze suppliers and sell unwanted assets, sell and lease back property ❝Large amount of leverage involved❝They take their profit in a variety of ways:-Refloat the company-Sell the company to someone else in the same business -Refinancing❝The private equity market was boosted in the early 2000s.❝IFSL shows that the global private equity investment amounted to $176.6bn in 2000, this increased to $317.6bn in 2007, then hit by the credit crisis andfell to $189bn.❝In the UK, well-known firms that are or have been owned by private equity groups: Boots, Iceland, Debenhams, New Look, Kwik-Fit❝E.g. In Dec. 2003, a group of private equity firms-Texas Pacific, CVC and Merrill Lynch Global Private Equity-bough Debenhams for £1.7bn, of which £600m was their own capital.❝In two refinancing in 2004 and 2005, they reconstructed the balance sheet with new borrowings and paid themselves back £1.3bn(twice of their original capital) in about 18 months. ❝They refloated Debenhams in May 2006.Explain the different types of investment institution. Identify and analyse the factors that will influence the investment strategy applied by each type of institution.。
(完整word版)投资学investment_题库Chap015
Multiple Choice Questions1. The term structure of interest rates is:A) The relationship between the rates of interest on all securities.B) The relationship between the interest rate on a security and its time tomaturity。
C) The relationship between the yield on a bond and its default rate。
D) All of the above.E）None of the above.Answer： B Difficulty: EasyRationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).2。
The yield curve shows at any point in time：A) The relationship between the yield on a bond and the duration of the bond。
B）The relationship between the coupon rate on a bond and time to maturity of the bond。
C）The relationship between yield on a bond and the time to maturity on the bond。
D）All of the above.E) None of the above。
investment exercisesTBChap08new
CHAPTER 8AN INTRODUCTION TO PORTFOLIO MANAGEMENTTRUE/FALSE QUESTIONS(t) 1 Risk is defined as the uncertainty of future outcomes.(t) 2 A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.(t) 3 The yield spread between yields on AAA bonds and BAA bonds is evidence that investors are risk averse.(t) 4 Standardizing the covariance by the individual standard deviation yields the correlation coefficient.(t) 5 The covariance is a measure of the degree to which two variables (e.g., rates of return) move together over time relative to their means.(f) 6 For a two stock portfolio containing Stocks i and j, the correlationcoefficient of returns (r i,j) is equal to the square root of the covariance (cov i,j).(f) 7 To reduce the standard deviation of a portfolio it is necessary to increasethe relative weight of assets with low volatility (small standarddeviation of returns).(t) 8 Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.(f) 9 A basic assumption of portfolio theory is that an investor would want tomaximize risk subject to a given level of return.(t) 10 Most investors hold a diversified portfolio in order to reduce portfolio risk.(f) 11 Most assets of the same type have negative covariances of returns with each other.MULTIPLE CHOICE QUESTIONS(a) 1 The optimal portfolio is identified at the point of tangency between theefficient frontier and thea)highest possible utility curve.b)lowest possible utility curve.c)middle range utility curve.d)steepest utility curve.e)flattest utility curve.379(d) 2 An individual investor’s utility curves specify the tradeoffs he or she iswilling to make betweena)high risk and low risk assets.b)high return and low return assets.c)covariance and correlation.d)return and risk.e)efficient portfolios.(c) 3 As the correlation coefficient between two assets decreases, the shape ofthe efficient frontiera)approaches a horizontal straight line.b)bends out.c)bends in.d)approaches a vertical straight line.e)none of the above.(d) 4 A portfolio manager is considering adding another security to hisportfolio. The correlations of the 5 alternatives available are listed below. Whichsecuritywould enable the highest level of risk diversificationa)0.0b)0.25c)-0.25d)-0.75e) 1.0(b) 5 A positive covariance between two variables indicates thata)the two variables move in different directions.b)the two variables move in the same direction.c)the two variables are low risk.d)the two variables are high risk.e)the two variables are risk free.(c) 6 A positive relationship between expected return and expected risk isconsistent witha)investors being risk seekers.b)investors being risk avoiders.c)investors being risk averse.d)all of the above.e)none of the above.380(d) 7 What information must you input to a computer program in order to derivethe portfolios that make up the efficient frontiera)Expected returns, covariances and correlations.b)Standard deviations, variances and covariances.c)Expected returns, standard deviations and variances.d)Expected returns, variances and correlations.e)Covariances, correlations and variances.(d) 8 The Markowitz model is based on several assumptions regarding investorbehavior. Which of the following is an assumption of the Markowitz model?a)Investors consider investment alternative as being represented by a jointprobability distribution of expected returns over some holding period.b)Investors minimize one-period expected utility.c)Investors estimate the risk of the portfolio on the basis of their utilityfunctions.d)Investors base decisions solely on expected return and risk.e)None of the above.(a) 9 As the correlation coefficient between two assets increases, the shape ofthe efficient frontiera)approaches a horizontal straight line.b)bends out.c)bends in.d)approaches a vertical straight line.e)none of the above.(d) 10 The probability of an adverse outcome is the definition of:a)Statistics.b)Variance.c)Random.d)Risk.e)Semivariance.(c) 11 Which of the following is a measure of risk?a)Range of standard deviationsb)Expected returnc)Standard deviationd)Covariancee)Correlation381(b) 12 Semivariance, when applied to portfolio theory, is concerned withthea)Square root of deviations from the mean.b)Deviations below the mean.c)Deviations above the mean.d)All deviations (above and below the mean).e)Summation of the squared deviations from the mean.(a) 13 With low, zero or negative correlations it is possible to derive portfoliosthat havea)Lower risk than the individual securities in the portfolio.b)Lower risk than the highest risk individual security in the portfolio.c)Higher risk than the individual securities that make up the portfolio.d)Higher risk than the highest risk individual security in the portfolio.e)None of the above.(d) 14 Which of the following statements are correlation coefficient isfalse?a)The values range between -1 to +1.b) A value of +1 implies that the returns for the two stocks move together in acompletely linear manner.c) A value of -1 implies that the returns move in a completely opposite direction.d) A value of zero means that the returns are zero.e)None of the above (that is, all statements are true)(a) 15 In a two stock portfolio, if the correlation coefficient between two stockswere to decrease over time everything else remaining constant the portfolio's riskwoulda)Decrease.b)Remain constant.c)Increase.d)Fluctuate positively and negatively.e)Be a negative value.(d) 16 Given the following correlations between pairs of stocks, a portfolioconstructed from which pair will have the lowest standard deviation?Correl(A,B) = 0, Correl(C,D) = 1, Correl(E,F) = 0.75, Correl(G,H) = -0.75, Correl(I,J) = -0.50.a)Pair A,Bb)Pair C,Dc)Pair E,F382d)Pair G,He)Pair I,J(c) 17 Given a portfolio of stocks the envelope curve containing the set of bestpossible combinations is known as thea)Efficient portfolio.b)Utility curve.c)Efficient frontier.d)Last frontier.e)Capital asset pricing model.(d) 18 Estimation error refers to potential errors that arise from estimatinga)Expected security returns.b)Standard deviations of expected returns.c)Correlations of expected returns.d)All of the above.e)None of the above.(a) 19 A portfolio is considered to be efficient if:a)No other portfolio offers higher expected returns with the same risk.b)No other portfolio offers lower risk with lower expected return.c)There is no portfolio with a higher return.d)There is no portfolio with lower risk.e)None of the aboveMULTIPLE CHOICE PROBLEMS(d) 1 Consider two securities, A and B. Security A and B have a correlationcoefficient of 0.65. Security A has standard deviation of 12, and security B hasstandard deviation of 25. Calculate the covariance between these two securities.a)300b)461.54c)261.54d)195e)200(a) 2 Calculate the expected return for a three asset portfolio with the followingAsset Exp. Ret. Std. Dev WeightA 0.0675 0.12 0.25B 0.1235 0.1675 0.35383C 0.1425 0.1835 0.40a)11.71%b)11.12%c)15.70%d)14.25%e) 6.75%.(c) 3 Given the following weights and expected security returns, calculate theexpected return for the portfolio.Weight Expected Return.20 .06.25 .08.30 .10.25 .12a).085b).090c).092d).097e)None of the above(d) 4 the standard deviation for stock A is 0.15 and for stock B, it is 0.20. Thecovariance between returns for these stocks is 0.01. The correlation coefficientbetween these two stocks is:a)-0.125b)0.195c)-0.285d)0.333e)0.405USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMSGiven: E(R1) = .10 E(R2) = .15E(SD1) = .03 E(SD2) = .05W1 = .30 W2 = .70(d) 5 Calculate the expected return of the two stock portfolio.a).105b).115c).125d).135384e)None of the above(c) 6 Calculate the expected standard deviation of the two stock portfolio whenthe correlation is 0.40.a).0016b).0160c).0395d).1558e).3950USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMSGiven the following information about two stocks:E(R1) = 0.12 E(R2) = 0.16E(SD1) = 0.08 E(SD2) = 0.15(a) 7 Calculate the expected return a two stock portfolio when w1 = 0.75.a)0.13b)0.136c)0.14d)0.125e)0.16(d) 8 Calculate the expected standard deviation of a two stock portfolio whenw1 = 0.75and the covariance between stock 1 and stock 2 is -0.009.a)0.1025b)0.0705c)0.0906d)0.0404e)0.0623(b) 9 Calculate the expected return a two stock portfolio when w1 = 0.60.a)0.13b)0.136c)0.14d)0.125e)0.16385(c) 10 Calculate the expected standard deviation of a two stock portfoliowhen w1 = 0.60and the covariance between stock 1 and stock 2 is 0.8.a)0.1025b)0.0705c)0.0906d)0.0404e)0.0623CHAPTER 8ANSWERS TO MULTIPLE CHOICE PROBLEMS1. Cov(A, B) = (0.65)(12)(25) = 1952. E(R) = (0.25)(0.0675) + (0.35)(0.1235) + (0.40)(0.1425) = 0.1171 or 11.71%3. E(R) = (0.20)(0.06) + (0.25)(0.08) + (0.30)(0.10) + (0.25)(0.12) = 0.092 or 9.2%4. Correlation = (0.01)(0.15 x 0.20) = 0.33335. E(R) = (.3 x .10) + (.7 x .15) = .1356. SD= [(.3)2(.03)2+ (.7)2(.05)2+ 2(.3)(.7)(.03)(.05)(.4)]1/2 = 0.039477. E(R) = (.75 x .12) + (.25 x .16) = 0.138. SD = [(.75)2(.04)2+ (.25)2(.06)2+ 2(.75)(.25)(-.0009)]1/2 = 0.04049. E(R) = (.60 x .12) + (.40 x .16) = 0.13610. SD= [(.6)2(.04)2+ (.4)2(.06)2+ 2(.6)(.4)(.8)]1/2 = 0.0906386。
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Investments 8ed Bodie 投资学 第八版 博迪 习题答案
Investments 8ed Bodie 投资学第八版博迪习题答案CHAPTER 1 THE INVESTMENT ENVIRONMENTPROBLEM SETS1 Ultimately it is true that real assets determine the material well being of an economy Nevertheless individuals can benefit when financial engineering creates new products that allow them to manage their portfolios of financial assets more efficiently Because bundling and unbundling creates financial products with new properties and sensitivities to various sources of risk it allows investors to hedge particular sources of risk more efficientlySecuritization requires access to a large number of potential investors To attract these investors the capital market needsa safe system of business laws and low probability of confiscatory taxationregulationa well-developed investment banking industrya well-developed system of brokerage and financialtransactions andwell-developed media particularly financial reportingThese characteristics are found in indeed make for a well-developed financial market3 Securitization leads to disintermediation that is securitization provides a means for market participants to bypass intermediaries For example mortgage-backed securities channel funds to the housing market without requiring that banks or thrift institutions make loans from their own portfolios As securitization progresses financial intermediaries must increase other activities such as providing short-term liquidity to consumers and small business and financial services4 Financial assets make it easy for large firms to raise the capital needed to finance their investments in real assets If General Motors for example could not issue stocks or bonds to the general public it would have a far more difficult time raising capital Contraction of the supply of financial assets would make financing more difficult thereby increasing the cost of capital A higher cost of capital results in less investment and lower real growth5 Even if the firm does not need to issue stock in any particular year the stock market is still important to the financial manager The stock price provides important information about how the market values the firms investment projects For example if the stock price rises considerably managers might conclude that the market believes the firms future prospects are bright This might be a useful signal to the firm to proceed with an investment such as an expansion of the firms businessIn addition the fact that shares can be traded in the secondary market makes the shares more attractive to investors since investors know that when they wish to they will be able to sell their shares This in turn makes investors more willing to buy shares in a primary offering and thus improves the terms on which firms can raise money in the equity market6 a Cash is a financial asset because it is the liability of the federal governmentb No The cash does not directly add to the productive capacity of the economyc Yesd Society as a whole is worse off since taxpayers as a group will make up for the liability7 a The bank loan is a financial liability for Lanni Lannis IOU is the banks financial asset The cash Lanni receives is a financial asset The new financial asset created is Lannis promissory note that is Lannis IOU to the bankb Lanni transfers financial assets cash to the software developers In return Lanni gets a real asset the completed software No financial assets are created or destroyed cash is simply transferred from one party to anotherc Lanni gives the real asset the software to Microsoft in exchange for a financial asset 1500 shares of Microsoft stock If Microsoft issues new shares in order to pay Lanni then this would represent the creation of new financial assetsd Lanni exchanges one financial asset 1500 shares of stock for another 120000 Lanni gives a financial asset 50000 cash to the bank and gets back another financial asset its IOU The loan is "destroyed" in the transaction since itis retired when paid off and no longer exists8 aAssets LiabilitiesShareholders equity Cash 70000 Bank loan50000 Computers 30000 Shareholders equity 50000 Total 100000 Total 100000 Ratio of real assets to total assets 30000100000 030bAssets LiabilitiesShareholders equity Software product 70000Bank loan 50000 Computers 30000Shareholders equity 50000 Total 100000Total 100000 Valued at costRatio of real assets to total assets 100000100000 10 cAssets LiabilitiesShareholders equity Microsoft shares 120000Bank loan 50000 Computers 30000Shareholders equity 100000 Total 150000Total 150000 Ratio of real assets to total assets 30000150000 020Conclusion when the firm starts up and raises working capital it is characterized by a low ratio of real assets tototal assets When it is in full production it has a high ratio of real assets to total assets When the project "shuts down" and the firm sells it off for cash financial assets once again replace real assets9 For commercial banks the ratio is 1075104109 0010For non-financial firms the ratio is 1329525164 0528 The difference should be expected primarily because the bulk of the business of financial institutions is to make loans which are financial assets for financial institutions10 a Primary-market transactionb Derivative assetsc Investors who wish to hold gold without the complication and cost of physical storage11 a A fixed salary means that compensation is at least in the short run independent of the firms success This salary structure does not tie the managers immediate compensation to the success of the firm However the manager might view this as the safest compensation structure and therefore value it more highlyb A salary that is paid in the form of stock in the firm means that the manager earns the most when the shareholders wealth is imized This structure is therefore most likely to align the interests of managers and shareholders If stock compensation is overdone however the manager might view it as overly risky since the managers career is already linked to the firm and this undiversified exposure would be exacerbated with a large stock position in the firmc Call options on shares of the firm create great incentives for managers to contribute to the firms success In some cases however stock options can lead to other agency problems For example a manager with numerous call options might be tempted to take on a very risky investment project reasoning that if the project succeeds the payoff will be huge while if it fails the losses are limited to the lost value of the options Shareholders in contrast bear the losses as wellas the gains on the project and might be less willing to assume that risk12 Even if an individual shareholder could monitor and improve managers performance and thereby increase the value of the firm the payoff would be small since the ownership share in a large corporation would be very small For example if you own 10000 of GM stock and can increase the value of the firm by 5 a very ambitious goal you benefit by only 005 10000 500 In contrast a bank that has a multimillion-dollar loan outstanding to the firm has a big stake in making sure that the firm can repay the loan It is clearly worthwhile for the bank to spend considerable resources to monitor the firm13 Mutual funds accept funds from small investors and invest on behalf of these investors in the national and international securities marketsPension funds accept funds and then invest on behalf of current and future retirees thereby channeling funds from one sector of the economy to anotherVenture capital firms pool the funds of private investors and invest in start-up firmsBanks accept deposits from customers and loan those funds to businesses or use the funds to buy securities of largecorporations14 Treasury bills serve a purpose for investors who prefer a low-risk investment The lower average rate of return compared to stocks is the price investors pay for predictability of investment performance and portfolio value15 With a top-down investing style you focus on asset allocation or the broad composition of the entire portfolio which is the major determinant of overall performance Moreover top-down management is the natural way to establish a portfolio with a level of risk consistent with your risk tolerance The disadvantage of an exclusive emphasis on top-down issues is that you may forfeit the potential high returns that could result from identifying and concentrating in undervalued securities or sectors of the market With a bottom-up investing style you try to benefit from identifying undervalued securities The disadvantage is that you tend to overlook the overall composition of your portfolio which may result in a non-diversified portfolio or a portfolio with a risk level inconsistent with your level of risk tolerance In addition this technique tends to require more active management thus generating more transaction costs Finally your analysis may be incorrect in which case you will have fruitlessly expended effort and money attempting to beat a simple buy-and-hold strategy16 You should be skeptical If the author actually knows how to achieve such returns one must question why the author would then be so ready to sell the secret to others Financialmarkets are very competitive one of the implications of this fact is that riches do not come easily High expected returns require bearing some risk and obvious bargains are few and far between Odds are that the only one getting rich from the book is its author17 a The SEC website defines the difference between saving and investing in terms of the investment alternatives or the financial assets the individual chooses to acquire According to the SEC website saving is the process of acquiring a safe financial asset and investing is the process of acquiring risky financial assetsb The economists definition of savings is the difference between income and consumption Investing is the process of allocating ones savings among available assets both real assets and financial assets The SEC definitions actually represent according the economists definition two kinds of investment alternatives18 As is the case for the SEC definitions see Problem 17 the SIA defines saving and investing as acquisition of alternative kinds of financial assets According to the SIA saving is the process of acquiring safe assets generally from a bank while investing is the acquisition of other financialassets such as stocks and bonds On the other hand the definitions in the chapter indicate that saving means spending less than ones income Investing is the process of allocating ones savings among financial assets including savings account deposits and money market accounts saving according to the SIA other financial assets such as stocks and bonds investing according to the SIA as well as real assetsCHAPTER 2 ASSET CLASSES ANDFINANCIAL INSTRUMENTSPROBLEM SETS1 Preferred stock is like long-term debt in that it typically promises a fixed payment each year In this way it is a perpetuity Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments Failure to make payments does not set off corporate bankruptcy With respect to the priority of claims to the assets of the firm in the event of corporate bankruptcy preferred stock has a higher priority than common equity but a lower priority than bonds2 Money market securities are called cash equivalentsbecause of their great liquidity The prices of money market securities are very stable and they can be converted to cash ie sold on very short notice and with very low transaction costs3 The spread will widen Deterioration of the economy increases credit risk that is the likelihood of default Investors will demand a greater premium on debt securities subject to default risk4 On the day we tried this experiment 36 of the 50 stocks met this criterion leading us to conclude that returns on stock investments can be quite volatile5 a You would have to pay the asked price of11831 11896875 of par 11896875b The coupon rate is 11750 implying coupon payments of 11750 annually or more precisely 5875 semiannually Current yield Annual coupon incomeprice1175011896875 00988 9886 P 10000102 9803927 The total before-tax income is 4 After the 70 exclusion for preferred stock dividends the taxable income is 030 4 120Therefore taxes are 030 120 036After-tax income is 400 – 036 364Rate of return is 3644000 9108 a General Dynamics closed today at 7459 which was 017 higher than yesterdays price Yesterdays closing price was 7442b You could buy 50007459 6703 sharesc Your annual dividend income would be 6703 092 6167d The price-to-earnings ratio is 16 and the price is 7459 Therefore7459Earnings per share 16 Earnings per share 4669 a At t 0 the value of the index is 90 50 100 3 80At t 1 the value of the index is 95 45 110 3 83333 The rate of return is 8333380 1 417In the absence of a split Stock C would sell for 110 so the value of the index would be 2503 83333After the split Stock C sells for 55 Therefore we need to find the divisor d such that83333 95 45 55 d d 2340c The return is zero The index remains unchanged becausethe return for each stock separately equals zero10 a Total market value at t 0 is 9000 10000 20000 39000Total market value at t 1 is 9500 9000 22000 40500Rate of return 4050039000 – 1 385The return on each stock is as followsrA 9590 – 1 00556rB 4550 – 1 –010rC 110100 – 1 010The equally-weighted average is[00556 -010 010]3 00185 18511 The after-tax yield on the corporate bonds is 009 1– 030 00630 630Therefore municipals must offer at least 630 yields12 Equation 22 shows that the equivalent taxable yield is r rm 1 – ta 400b 444c 500d 57113 a The higher coupon bondb The call with the lower exercise pricec The put on the lower priced stock14 a You bought the contract when the futures price was 142750 see Figure 212 The contract closes at a price of 1300 which is 12750 less than the original futures price The contract multiplier is 250 Therefore the loss will be12750 250 31875b Open interest is 601655 contracts15 a Since the stock price exceeds the exercise price you will exercise the callThe payoff on the option will be 42 40 2The option originally cost 214 so the profit is 200 214014Rate of return 014214 00654 654b If the call has an exercise price of 4250 you would not exercise for any stock price of 4250 or less The loss on the call would be the initial cost 072c Since the stock price is less than the exercise price you will exercise the putThe payoff on the option will be 4250 4200 050The option originally cost 183 so the profit is 050 183 133Rate of return 133183 07268 726816 There is always a possibility that the option will be in-the-money at some time prior to expiration Investors will pay something for this possibility of a positive payoff17Value of call at expiration Initial Cost Profita 0 4 -4b 0 4 -4 c0 4 -4 d 5 4 1 e 10 46Value of put at expiration Initial Cost Profita 10 6 4b 5 6 -1c 06 -6 d 0 6 -6 e 0 6-618 A put option conveys the right to sell the underlying asset at the exercise price A short position in a futures contract carries an obligation to sell the underlying asset at the futures price19 A call option conveys the right to buy the underlying asset at the exercise price A long position in a futures contract carries an obligation to buy the underlying asset at the futures priceCFA PROBLEMSd2 The equivalent taxable yield is 675 1 034 10233 a Writing a call entails unlimited potential losses as the stock price rises4 a The taxable bond With a zero tax bracket the after-tax yield for the taxable bond is the same as the before-tax yield5 which is greater than the yield on the municipal bondThe taxable bond The after-tax yield for the taxable bond is005 1 – 010 45You are indifferent The after-tax yield for the taxable bond is005 1 – 020 40The after-tax yield is the same as that of the municipal bondd The municipal bond offers the higher after-tax yield for investors in tax brackets above 20If the after-tax yields are equal then 0056 008 1 –tThis implies that t 030 30CHAPTER 3 HOW SECURITIES ARE TRADEDPROBLEM SETSAnswers to this problem will vary2 The SuperDot system expedites the flow of orders from exchange members to the specialists It allows members to send computerized orders directly to the floor of the exchange whichallows the nearly simultaneous sale of each stock in a large portfolio This capability is necessary for program trading3 The dealer sets the bid and asked price Spreads should be higher on inactively traded stocks and lower on actively traded stocks4 a In principle potential losses are unbounded growing directly with increases in the price of IBMb If the stop-buy order can be filled at 128 the imum possible loss per share is 8 If the price of IBM shares goes above 128 then the stop-buy order would be executed limiting the losses from the short sale5 a The stock is purchased for 300 40 12000The amount borrowed is 4000 Therefore the investor put up equity or margin of 8000If the share price falls to 30 then the value of the stock falls to 9000 By the end of the year the amount of the loan owed to the broker grows to4000 108 4320Therefore the remaining margin in the investors account is 9000 4320 4680The percentage margin is now 46809000 052 52Therefore the investor will not receive a margin callThe rate of return on the investment over the year isEnding equity in the account Initial equity Initial equity4680 8000 8000 0415 4156 a The initial margin was 050 1000 40 20000As a result of the increase in the stock price Old Economy Traders loses10 1000 10000Therefore margin decreases by 10000 Moreover Old Economy Traders must pay the dividend of 2 per share to the lender of the shares so that the margin in the account decreases by an additional 2000 Therefore the remaining margin is 20000 – 10000 – 2000 8000b The percentage margin is 800050000 016 16So there will be a margin callc The equity in the account decreased from 20000 to 8000 in one year for a rate of return of 1200020000 060 607 Much of what the specialist does eg crossing orders and maintaining the limit order book can be accomplished by a computerized system In fact some exchanges use an automated system for night trading A more difficult issue to resolve is whether the more discretionary activities of specialists involving trading for their own accounts eg maintaining an orderly market can be replicated by a computer system8 a The buy order will be filled at the best limit-sell order price 5025b The next market buy order will be filled at the next-best limit-sell order price 5150c You would want to increase your inventory There is considerable buying demand at prices just below 50 indicating that downside risk is limited In contrast limit sell orders are sparse indicating that a moderate buy order could result in a substantial price increase9 a You buy 200 shares of Telecom for 10000 These shares increase in value by 10 or 1000 You pay interest of 008 5000 400The rate of return will be012 12b The value of the 200 shares is 200P Equity is 200P –5000 You will receive a margin call when030 when P 3571 or lower10 a Initial margin is 50 of 5000 or 2500b Total assets are 7500 5000 from the sale of the stock and 2500 put up for margin Liabilities are 100P Therefore equity is 7500 – 100P A margin call will be issued when 030 when P 5769 or higher11 The total cost of the purchase is 40 500 20000You borrow 5000 from your broker and invest 15000 of your own funds Your margin account starts out with equity of 15000a i Equity increases to 44 500 – 5000 17000Percentage gain 200015000 01333 1333ii With price unchanged equity is unchangedPercentage gain zeroiii Equity falls to 36 500 – 5000 13000Percentage gain –200015000 –01333 –1333The relationship between the percentage return and the percentage change in the price of the stock is given by return change in price change in price 1333 For example when the stock price rises from 40 to 44 the percentage change in price is 10 while the percentage gain forthe investor isreturn 10 1333b The value of the 500 shares is 500P Equity is 500P –5000 You will receive a margin call when025 when P 1333 or lowerc The value of the 500 shares is 500P But now you have borrowed 10000 instead of 5000 Therefore equity is 500P –10000 You will receive a margin call when025 when P 2667With less equity in the account you are far more vulnerable to a margin callBy the end of the year the amount of the loan owed to the broker grows to5000 108 5400The equity in your account is 500P –5400 Initial equity was 15000 Therefore your rate of return after one year is as followsi 01067 1067ii –00267 –267–01600 –1600The relationship between the percentage return and the percentage change in the price of Intel is given by returnFor example when the stock price rises from 40 to 44 the percentage change in price is 10 while the percentage gain for the investor is1067e The value of the 500 shares is 500P Equity is 500P –5400 You will receive a margin call when025 when P 1440 or lower12 a The gain or loss on the short position is –500 PInvested funds 15000Therefore rate of return –500 P 15000The rate of return in each of the three scenarios isi rate of return –500 15000 –01333 –1333ii rate of return –500 15000 0iii rate of return [–500 –4 ]15000 01333 1333b Total assets in the margin account equal20000 from the sale of the stock 15000 the initial margin 35000Liabilities are 500P You will receive a margin call when 025 when P 56 or higherWith a 1 dividend the short position must now pay on the borrowed shares 1share 500 shares 500 Rate of return is now[ –500 P – 500]15000i rate of return [ –500 4 –500]15000 –01667 –1667ii rate of return [ –500 0 –500]15000 –00333 –333iii rate of return [ –500 –4 – 500]15000 01000 1000Total assets are 35000 and liabilities are 500P 500 A margin call will be issued when025 when P 5520 or higher13 The broker is instructed to attempt to sell your Marriott stock as soon as the Marriott stock trades at a bid price of 38 or less Here the broker will attempt to execute but may not be able to sell at 38 since the bid price is now 3795 The price at which you sell may be more or less than 38 because the stop-loss becomes a market order to sell at current market prices14 a 5550b 5525c The trade will not be executed because the bid price is lower than the price specified in the limit sell orderd The trade will not be executed because the asked price is greater than the price specified in the limit buy order15 a In an exchange market there can be price improvement in the two market orders Brokers for each of the market orders ie the buy order and the sell order can agree to execute a trade inside the quoted spread For example they can trade at 5537 thus improving the price for both customers by 012 or 013 relative to the quoted bid and asked prices The buyer gets the stock for 013 less than the quoted asked price and the seller receives 012 more for the stock than the quoted bid priceb Whereas the limit order to buy at 5537 would not be executed in a dealer market since the asked price is 5550 it could be executed in an exchange market A broker for another customer with an order to sell at market would view the limit buy order as the best bid price the two brokers could agree to the trade and bring it to the specialist who would then execute the trade16 a You will not receive a margin call You borrowed 20000 and with another 20000 of your own equity you bought 1000 shares of Disney at 40 per share At 35 per share the market value of the stock is 35000 your equity is 15000 and the percentage margin is 1500035000 429Your percentage margin exceeds the required maintenance marginYou will receive a margin call when035 when P 3077 or lowerThe proceeds from the short sale net of commission were14 100 – 50 1350A dividend payment of 200 was withdrawn from the account Covering the short sale at 9 per share cost you including commission 900 50 950Therefore the value of your account is equal to the net profit on the transaction1350 – 200 – 950 200Note that your profit 200 equals 100 shares profit per share of 2 Your net proceeds per share was14 selling price of stock–9 repurchase price of stock–2 dividend per share–1 2 trades 050 commission per share2CFA PROBLEMS1 a In addition to the explicit fees of 70000 FBN appears to have paid an implicit price in underpricing of the IPO The underpricing is 3 per share or a total of 300000 implying total costs of 370000b No The underwriters do not capture the part of the costs corresponding to the underpricing The underpricing may be arational marketing strategy Without it the underwriters would need to spend more resources in order to place the issue with the public The underwriters would then need to charge higher explicit fees to the issuing firm The issuing firm may be just as well off paying the implicit issuance cost represented by the underpricing2 d The broker will sell at current market price after the first transaction at 55 or less3 dCHAPTER 4 MUTUAL FUNDS ANDOTHER INVESTMENT COMPANIESPROBLEM SETS1 The unit investment trust should have lower operating expenses Because the investment trust portfolio is fixed once the trust is established it does not have to pay portfolio managers to constantly monitor and rebalance the portfolio as perceived needs or opportunities change Because the portfolio is fixed the unit investment trust also incurs virtually no trading costs2 a Unit investment trusts diversification from large-scale investing lower transaction costs associated with large-scale trading low management fees predictable portfoliocomposition guaranteed low portfolio turnover rateb Open-end mutual funds diversification from large-scale investing lower transaction costs associated with large-scale trading professional management that may be able to take advantage of buy or sell opportunities as they arise record keepingc Individual stocks and bonds No management fee realization of capital gains or losses can be coordinated with investors personal tax situations portfolio can be designed to investors specific risk profile3 Open-end funds are obligated to redeem investors shares at net asset value and thus must keep cash or cash-equivalent securities on hand in order to meet potential redemptions Closed-end funds do not need the cash reserves because there are no redemptions for closed-end funds Investors in closed-end funds sell their shares when they wish to cash out4 Balanced funds keep relatively stable proportions of funds invested in each asset class They are meant as convenient instruments to provide participation in a range of asset classes Life-cycle funds are balanced funds whose asset mix generally depends on the age of the investor Aggressive life-cycle funds with larger investments in equities are。
Essentials Of Investments 8th Ed Bodie 投资学精要(第八版)课后习题答案Chap007
CHAPTER 07CAPITAL ASSET PRICING AND ARBITRAGE PRICINGTHEORY1. The required rate of return on a stock is related to the required rate of return on thestock market via beta. Assuming the beta of Google remains constant, the increase in the risk of the market will increase the required rate of return on the market, and thus increase the required rate of return on Google.2. An example of this scenario would be an investment in the SMB and HML. As of yet,there are no vehicles (index funds or ETFs) to directly invest in SMB and HML. While they may prove superior to the single index model, they are not yet practical, even for professional investors.3. The APT may exist without the CAPM, but not the other way. Thus, statement a ispossible, but not b. The reason being, that the APT accepts the principle of risk and return, which is central to CAPM, without making any assumptions regardingindividual investors and their portfolios. These assumptions are necessary to CAPM.4. E(r P ) = r f + β[E(r M ) – r f ]20% = 5% + β(15% – 5%) ⇒ β = 15/10 = 1.55. If the beta of the security doubles, then so will its risk premium. The current riskpremium for the stock is: (13% - 7%) = 6%, so the new risk premium would be 12%, and the new discount rate for the security would be: 12% + 7% = 19%If the stock pays a constant dividend in perpetuity, then we know from the original data that the dividend (D) must satisfy the equation for a perpetuity:Price = Dividend/Discount rate 40 = D/0.13 ⇒ D = 40 ⨯ 0.13 = $5.20 At the new discount rate of 19%, the stock would be worth: $5.20/0.19 = $27.37The increase in stock risk has lowered the value of the stock by 31.58%.6. The cash flows for the project comprise a 10-year annuity of $10 million per year plus anadditional payment in the tenth year of $10 million (so that the total payment in the tenth year is $20 million). The appropriate discount rate for the project is:r f + β[E(r M ) – r f ] = 9% + 1.7(19% – 9%) = 26% Using this discount rate:NPV = –20 + +∑=101t t26.1101026.110= –20 + [10 ⨯ Annuity factor (26%, 10 years)] + [10 ⨯ PV factor (26%, 10 years)] = 15.64The internal rate of return on the project is 49.55%. The highest value that beta can take before the hurdle rate exceeds the IRR is determined by:49.55% = 9% + β(19% – 9%) ⇒ β = 40.55/10 = 4.055 7. a. False. β = 0 implies E(r) = r f , not zero.b. False. Investors require a risk premium for bearing systematic (i.e., market orundiversifiable) risk.c. False. You should invest 0.75 of your portfolio in the market portfolio, and theremainder in T-bills. Then: βP = (0.75 ⨯ 1) + (0.25 ⨯ 0) = 0.758.a. The beta is the sensitivity of the stock's return to the market return. Call theaggressive stock A and the defensive stock D . Then beta is the change in the stock return per unit change in the market return. We compute each stock's beta by calculating the difference in its return across the two scenarios divided by the difference in market return.00.2205322A =--=β70.0205145.3D =--=βb. With the two scenarios equal likely, the expected rate of return is an average ofthe two possible outcomes: E(r A ) = 0.5 ⨯ (2% + 32%) = 17%E(r B ) = 0.5 ⨯ (3.5% + 14%) = 8.75%c. The SML is determined by the following: T-bill rate = 8% with a beta equal tozero, beta for the market is 1.0, and the expected rate of return for the market is:0.5 ⨯ (20% + 5%) = 12.5%See the following graph.812.5%S M LThe equation for the security market line is: E(r) = 8% + β(12.5% – 8%) d. The aggressive stock has a fair expected rate of return of:E(r A ) = 8% + 2.0(12.5% – 8%) = 17%The security analyst’s estimate of the expected rate of return is also 17%.Thus the alpha for the aggressive stock is zero. Similarly, the required return for the defensive stock is:E(r D ) = 8% + 0.7(12.5% – 8%) = 11.15%The security analyst’s estimate of the expected return for D is only 8.75%, and hence:αD = actual expected return – required return predicted by CAPM= 8.75% – 11.15% = –2.4%The points for each stock are plotted on the graph above.e. The hurdle rate is determined by the project beta (i.e., 0.7), not by the firm’sbeta. The correct discount rate is therefore 11.15%, the fair rate of return on stock D.9. Not possible. Portfolio A has a higher beta than Portfolio B, but the expected returnfor Portfolio A is lower.10. Possible. If the CAPM is valid, the expected rate of return compensates only forsystematic (market) risk as measured by beta, rather than the standard deviation, which includes nonsystematic risk. Thus, Portfolio A's lower expected rate of return can be paired with a higher standard deviation, as long as Portfolio A's beta is lower than that of Portfolio B.11. Not possible. The reward-to-variability ratio for Portfolio A is better than that of themarket, which is not possible according to the CAPM, since the CAPM predicts that the market portfolio is the most efficient portfolio. Using the numbers supplied:S A =5.0121016=- S M =33.0241018=-These figures imply that Portfolio A provides a better risk-reward tradeoff than the market portfolio.12. Not possible. Portfolio A clearly dominates the market portfolio. It has a lowerstandard deviation with a higher expected return.13. Not possible. Given these data, the SML is: E(r) = 10% + β(18% – 10%)A portfolio with beta of 1.5 should have an expected return of: E(r) = 10% + 1.5 ⨯ (18% – 10%) = 22%The expected return for Portfolio A is 16% so that Portfolio A plots below the SML (i.e., has an alpha of –6%), and hence is an overpriced portfolio. This is inconsistent with the CAPM.14. Not possible. The SML is the same as in Problem 12. Here, the required expectedreturn for Portfolio A is: 10% + (0.9 ⨯ 8%) = 17.2%This is still higher than 16%. Portfolio A is overpriced, with alpha equal to: –1.2%15. Possible. Portfolio A's ratio of risk premium to standard deviation is less attractivethan the market's. This situation is consistent with the CAPM. The market portfolio should provide the highest reward-to-variability ratio.16.a.b.As a first pass we note that large standard deviation of the beta estimates. None of the subperiod estimates deviate from the overall period estimate by more than two standard deviations. That is, the t-statistic of the deviation from the overall period is not significant for any of the subperiod beta estimates. Looking beyond the aforementioned observation, the differences can be attributed to different alpha values during the subperiods. The case of Toyota is most revealing: The alpha estimate for the first two years is positive and for the last two years negative (both large). Following a good performance in the "normal" years prior to the crisis, Toyota surprised investors with a negative performance, beyond what could be expected from the index. This suggests that a beta of around 0.5 is more reliable. The shift of the intercepts from positive to negative when the index moved to largely negative returns, explains why the line is steeper when estimated for the overall period. Draw a line in the positive quadrant for the index with a slope of 0.5 and positive intercept. Then draw a line with similar slope in the negative quadrant of the index with a negative intercept. You can see that a line that reconciles the observations for both quadrants will be steeper. The same logic explains part of the behavior of subperiod betas for Ford and GM.17. Since the stock's beta is equal to 1.0, its expected rate of return should be equal to thatof the market, that is, 18%. E(r) =01P P P D -+0.18 =100100P 91-+⇒ P 1 = $10918. If beta is zero, the cash flow should be discounted at the risk-free rate, 8%:PV = $1,000/0.08 = $12,500If, however, beta is actually equal to 1, the investment should yield 18%, and the price paid for the firm should be:PV = $1,000/0.18 = $5,555.56The difference ($6944.44) is the amount you will overpay if you erroneously assume that beta is zero rather than 1.ing the SML: 6% = 8% + β(18% – 8%) ⇒β = –2/10 = –0.220.r1 = 19%; r2 = 16%; β1 = 1.5; β2 = 1.0a.In order to determine which investor was a better selector of individual stockswe look at the abnormal return, which is the ex-post alpha; that is, the abnormalreturn is the difference between the actual return and that predicted by the SML.Without information about the parameters of this equation (i.e., the risk-free rateand the market rate of return) we cannot determine which investment adviser isthe better selector of individual stocks.b.If r f = 6% and r M = 14%, then (using alpha for the abnormal return):α1 = 19% – [6% + 1.5(14% – 6%)] = 19% – 18% = 1%α2 = 16% – [6% + 1.0(14% – 6%)] = 16% – 14% = 2%Here, the second investment adviser has the larger abnormal return and thusappears to be the better selector of individual stocks. By making betterpredictions, the second adviser appears to have tilted his portfolio toward under-priced stocks.c.If r f = 3% and r M = 15%, then:α1 =19% – [3% + 1.5(15% – 3%)] = 19% – 21% = –2%α2 = 16% – [3%+ 1.0(15% – 3%)] = 16% – 15% = 1%Here, not only does the second investment adviser appear to be a better stockselector, but the first adviser's selections appear valueless (or worse).21.a.Since the market portfolio, by definition, has a beta of 1.0, its expected rate ofreturn is 12%.b.β = 0 means the stock has no systematic risk. Hence, the portfolio's expectedrate of return is the risk-free rate, 4%.ing the SML, the fair rate of return for a stock with β= –0.5 is:E(r) = 4% + (–0.5)(12% – 4%) = 0.0%The expected rate of return, using the expected price and dividend for next year: E(r) = ($44/$40) – 1 = 0.10 = 10%Because the expected return exceeds the fair return, the stock must be under-priced.22.The data can be summarized as follows:ing the SML, the expected rate of return for any portfolio P is:E(r P) = r f + β[E(r M) – r f ]Substituting for portfolios A and B:E(r A) = 6% + 0.8 ⨯ (12% – 6%) = 10.8%E(r B) = 6% + 1.5 ⨯ (12% – 6%) = 15.0%Hence, Portfolio A is desirable and Portfolio B is not.b.The slope of the CAL supported by a portfolio P is given by:S =P fP σr)E(r-Computing this slope for each of the three alternative portfolios, we have:S (S&P 500) = 6/20S (A) = 5/10S (B) = 8/31Hence, portfolio A would be a good substitute for the S&P 500.23.Since the beta for Portfolio F is zero, the expected return for Portfolio F equals therisk-free rate.For Portfolio A, the ratio of risk premium to beta is: (10% - 4%)/1 = 6%The ratio for Portfolio E is higher: (9% - 4%)/(2/3) = 7.5%This implies that an arbitrage opportunity exists. For instance, you can create aPortfolio G with beta equal to 1.0 (the same as the beta for Portfolio A) by taking a long position in Portfolio E and a short position in Portfolio F (that is, borrowing at the risk-free rate and investing the proceeds in Portfolio E). For the beta of G to equal 1.0, theproportion (w) of funds invested in E must be: 3/2 = 1.5The expected return of G is then:E(r G) = [(-0.50) ⨯ 4%] + (1.5 ⨯ 9%) = 11.5%βG = 1.5 ⨯ (2/3) = 1.0Comparing Portfolio G to Portfolio A, G has the same beta and a higher expected return.Now, consider Portfolio H, which is a short position in Portfolio A with the proceedsinvested in Portfolio G:βH = 1βG + (-1)βA = (1 ⨯ 1) + [(-1) ⨯ 1] = 0E(r H) = (1 ⨯ r G) + [(-1) ⨯ r A] = (1 ⨯ 11.5%) + [(- 1) ⨯ 10%] = 1.5%The result is a zero investment portfolio (all proceeds from the short sale of Portfolio Aare invested in Portfolio G) with zero risk (because β = 0 and the portfolios are welldiversified), and a positive return of 1.5%. Portfolio H is an arbitrage portfolio.24.Substituting the portfolio returns and betas in the expected return-beta relationship, weobtain two equations in the unknowns, the risk-free rate (r f ) and the factor return (F):14.0% = r f + 1 ⨯ (F – r f )14.8% = r f + 1.1 ⨯ (F – r f )From the first equation we find that F = 14%. Substituting this value for F into the second equation, we get:14.8% = r f + 1.1 ⨯ (14% – r f ) ⇒ r f = 6%25.a.Shorting equal amounts of the 10 negative-alpha stocks and investing the proceedsequally in the 10 positive-alpha stocks eliminates the market exposure and creates azero-investment portfolio. Using equation 7.5, and denoting the market factor as R M,the expected dollar return is [noting that the expectation of residual risk (e) inequation 7.8 is zero]:$1,000,000 ⨯ [0.03 + (1.0 ⨯ R M)] – $1,000,000 ⨯ [(–0.03) + (1.0 ⨯ R M)]= $1,000,000 ⨯ 0.06 = $60,000The sensitivity of the payoff of this portfolio to the market factor is zero because theexposures of the positive alpha and negative alpha stocks cancel out. (Notice thatthe terms involving R M sum to zero.) Thus, the systematic component of total riskalso is zero. The variance of the analyst's profit is not zero, however, since thisportfolio is not well diversified.For n = 20 stocks (i.e., long 10 stocks and short 10 stocks) the investor will have a$100,000 position (either long or short) in each stock. Net market exposure is zero,but firm-specific risk has not been fully diversified. The variance of dollar returnsfrom the positions in the 20 firms is:20 ⨯ [(100,000 ⨯ 0.30)2] = 18,000,000,000The standard deviation of dollar returns is $134,164.b.If n = 50 stocks (i.e., 25 long and 25 short), $40,000 is placed in each position,and the variance of dollar returns is:50 ⨯ [(40,000 ⨯ 0.30)2] = 7,200,000,000The standard deviation of dollar returns is $84,853.Similarly, if n = 100 stocks (i.e., 50 long and 50 short), $20,000 is placed ineach position, and the variance of dollar returns is:100 ⨯ [(20,000 ⨯ 0.30)2] = 3,600,000,000The standard deviation of dollar returns is $60,000.Notice that when the number of stocks increases by a factor of 5 (from 20 to 100),standard deviation falls by a factor of 5= 2.236, from $134,164 to $60,000. 26.Any pattern of returns can be "explained" if we are free to choose an indefinitely largenumber of explanatory factors. If a theory of asset pricing is to have value, it mustexplain returns using a reasonably limited number of explanatory variables (i.e.,systematic factors).27.The APT factors must correlate with major sources of uncertainty, i.e., sources ofuncertainty that are of concern to many investors. Researchers should investigatefactors that correlate with uncertainty in consumption and investment opportunities.GDP, the inflation rate and interest rates are among the factors that can be expected to determine risk premiums. In particular, industrial production (IP) is a good indicator of changes in the business cycle. Thus, IP is a candidate for a factor that is highlycorrelated with uncertainties related to investment and consumption opportunities in the economy.28.The revised estimate of the expected rate of return of the stock would be the oldestimate plus the sum of the unexpected changes in the factors times the sensitivitycoefficients, as follows:Revised estimate = 14% + [(1 ⨯ 1) + (0.4 ⨯ 1)] = 15.4%29.Equation 7.11 applies here:E(r P) = r f + βP1[E(r1) - r f] + βP2[E(r2) – r f]We need to find the risk premium for these two factors:γ1 = [E(r1) - r f] andγ2 = [E(r2) - r f]To find these values, we solve the following two equations with two unknowns: 40% = 7% + 1.8γ1 + 2.1γ210% = 7% + 2.0γ1 + (-0.5)γ2The solutions are: γ1 = 4.47% and γ2 = 11.86%Thus, the expected return-beta relationship is:E(r P) = 7% + 4.47βP1 + 11.86βP230.The first two factors (the return on a broad-based index and the level of interest rates)are most promising with respect to the likely impa ct on Jennifer’s firm’s cost of capital.These are both macro factors (as opposed to firm-specific factors) that can not bediversified away; consequently, we would expect that there is a risk premiumassociated with these factors. On the other hand, the risk of changes in the price ofhogs, while important to some firms and industries, is likely to be diversifiable, andtherefore is not a promising factor in terms of its impact on the firm’s cost of capital.31.Since the risk free rate is not given, we assume a risk free rate of 0%. The APT required(i.e., equilibrium) rate of return on the stock based on Rf and the factor betas is:Required E(r) = 0 + (1 x 6) + (0.5 x 2) + (0.75 x 4) = 10%According to the equation for the return on the stock, the actually expected return onthe stock is 6 % (because the expected surprises on all factors are zero by definition).Because the actually expected return based on risk is less than the equilibrium return,we conclude that the stock is overpriced.CFA 1a, c and dCFA 2a.E(r X) = 5% + 0.8(14% – 5%) = 12.2%αX = 14% – 12.2% = 1.8%E(r Y) = 5% + 1.5(14% – 5%) = 18.5%αY = 17% – 18.5% = –1.5%b.(i)For an investor who wants to add this stock to a well-diversified equityportfolio, Kay should recommend Stock X because of its positivealpha, while Stock Y has a negative alpha. In graphical terms, StockX’s expected return/risk profile plots above the SML, while Stock Y’sprofile plots below the SML. Also, depending on the individual riskpreferences of Kay’s clients, Stock X’s lower beta may have abeneficial impact on overall portfolio risk.(ii)For an investor who wants to hold this stock as a single-stock portfolio,Kay should recommend Stock Y, because it has higher forecastedreturn and lower standard deviation than S tock X. Stock Y’s Sharperatio is:(0.17 – 0.05)/0.25 = 0.48Stock X’s Sharpe ratio is only:(0.14 – 0.05)/0.36 = 0.25The market index has an even more attractive Sharpe ratio:(0.14 – 0.05)/0.15 = 0.60However, given the choice between Stock X and Y, Y is superior.When a stock is held in isolation, standard deviation is the relevantrisk measure. For assets held in isolation, beta as a measure of risk isirrelevant. Although holding a single asset in isolation is not typicallya recommended investment strategy, some investors may hold what isessentially a single-asset portfolio (e.g., the stock of their employercompany). For such investors, the relevance of standard deviationversus beta is an important issue.CFA 3a.McKay should borrow funds and i nvest those funds proportionally in Murray’sexisting portfolio (i.e., buy more risky assets on margin). In addition toincreased expected return, the alternative portfolio on the capital market line(CML) will also have increased variability (risk), which is caused by the higherproportion of risky assets in the total portfolio.b.McKay should substitute low beta stocks for high beta stocks in order to reducethe overall beta of York’s portfolio. By reducing the overall portfolio beta,McKay will reduce the systematic risk of the portfolio and therefore theportfolio’s volatility relative to the market. The security market line (SML)suggests such action (moving down the SML), even though reducing beta mayresult in a slight loss of portfolio efficiency unless full diversification ismaintained. York’s primary objective, however, is not to maintain efficiencybut to reduce risk exposure; reducing portfolio beta meets that objective.Because York does not permit borrowing or lending, McKay cannot reduce riskby selling equities and using the proceeds to buy risk free assets (i.e., by lendingpart of the portfolio).CFA 4c.“Both the CAPM and APT require a mean-variance efficient market portfolio.”This statement is incorrect. The CAPM requires the mean-variance efficientportfolio, but APT does not.d.“The CAPM assumes that one specific factor explains security returns but APTdoes not.” This statement is c orrect.CFA 5aCFA 6dCFA 7d You need to know the risk-free rate.CFA 8d You need to know the risk-free rate.CFA 9Under the CAPM, the only risk that investors are compensated for bearing is the riskthat cannot be diversified away (i.e., systematic risk). Because systematic risk(measured by beta) is equal to 1.0 for each of the two portfolios, an investor wouldexpect the same rate of return from each portfolio. Moreover, since both portfolios are well diversified, it does not matter whether the specific risk of the individual securities is high or low. The firm-specific risk has been diversified away from both portfolios. CFA 10b r f = 8% and E(r M) = 16%E(r X) = r f + βX[E(r M) – r f] = 8% + 1.0(16% - 8%) = 16%E(r Y) = r f + βY[E(r M) – r f] = 8% + 0.25(16% - 8%) = 10%Therefore, there is an arbitrage opportunity.CFA 11cCFA 12dCFA 13cInvestors will take on as large a position as possible only if the mis-pricingopportunity is an arbitrage. Otherwise, considerations of risk anddiversification will limit the position they attempt to take in the mis-pricedsecurity.CFA 14d。
投资学第八版英文答案CHAPTE...
投资学第八版英文答案CHAPTE...CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS PROBLEM SETS1. Preferred stock is like long-term debt in that it typically promisesa fixed payment each year. In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm.Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not set off corporate bankruptcy. With respect to thepriority of claims to the assets of the firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds.2. Money market securities are called “cash equivalents” because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs.3. The spread will widen. Deterioration of the economy increases credit risk, that is, the likelihood of default. Investors will demand a greater premium on debt securities subject to default risk.4. On the day we tried this experiment, 36 of the 50 stocks met this criterion, leading us to conclude that returns on stock investments can be quite volatile.5. a. You would have to pay the asked price of:118:31 = 118.96875% of par = $1,189.6875b. The coupon rate is 11.750% implying coupon payments of$117.50 annually or, more precisely, $58.75 semiannually.Current yield = Annual coupon income/price= $117.50/$1,189.6875 = 0.0988 = 9.88%6. P = $10,000/1.02 = $9,803.927. The total before-tax income is $4. After the 70% exclusion for preferred stock dividends, the taxable income is: 0.30 $4 = $1.20 Therefore, taxes are: 0.30 $1.20 = $0.36After-tax income is: $4.00 – $0.36 = $3.64Rate of return is: $3.64/$40.00 = 9.10%8. a. General Dynamics closed today at $74.59, which was $0.17 higher than yesterday’s price.Yesterday’s closing price was: $74.42b. You could buy: $5,000/$74.59 = 67.03 sharesc. Your annual dividend income would be: 67.03 ? $0.92 = $61.67d. The price-to-earnings ratio is 16 and the price is $74.59. Therefore: $74.59/Earnings per share = 16 ? Earnings per share = $4.669. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.333 The rate of return is: (83.333/80) - 1 = 4.17%In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 = 83.333After the split, Stock C sells for 55. Therefore, we need to find the divisor (d) such that:83.333 = (95 + 45 + 55)/d ? d = 2.340c. The return is zero. The index remains unchanged because the returnfor each stock separately equals zero.10. a. Total market value at t = 0 is: ($9,000 + $10,000 + $20,000) = $39,000Total market value at t = 1 is: ($9,500 + $9,000 + $22,000) = $40,500 Rate of return = ($40,500/$39,000) – 1 = 3.85% The return on each stock is as follows:r A = (95/90) – 1 = 0.0556r B = (45/50) – 1 = –0.10r C = (110/100) – 1 = 0.10The equally-weighted average is:[0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85%11. The after-tax yield on the corporate bonds is: 0.09 ? (1 –0.30) =0.0630 = 6.30%Therefore, municipals must offer at least 6.30% yields.12. Equation (2.2) shows that the equivalent taxable yield is: r = r m/(1– t)a. 4.00%b. 4.44%c. 5.00%d. 5.71%13. a. The higher coupon bond.b. The call with the lower exercise price.c. The put on the lower priced stock.14. a. You bought the contract when the futures price was 1427.50 (see Figure 2.12). The contract closes at a price of 1300, which is 127.50 less than the original futures price. The contract multiplier is $250. Therefore, the loss will be:127.50 ? $250 = $31,875b. Open interest is 601,655 contracts.15. a. Since the stock price exceeds the exercise price, you will exercise the call.The payoff on the option will be: $42 - $40 = $2The option originally cost $2.14, so the profit is: $2.00 - $2.14 = -$0.14 Rate of return = -$0.14/$2.14 = -0.0654 = -6.54%b. If the call has an exercise price of $42.50, you would not exercise for any stock price of $42.50 or less. The loss on the call would be the initial cost: $0.72c. Since the stock price is less than the exercise price, you will exercise the put.The payoff on the option will be: $42.50 $42.00 = $0.50The option originally cost $1.83 so the profit is: $0.50 ? $1.83 = ?$1.33 Rate of return = ?$1.33/$1.83 = ?0.7268 = ?72.68%16. There is always a possibility that the option will be in-the-money at some time prior to expiration. Investors will pay something for this possibility of a positive payoff.17.Value of call at expiration InitialCostProfita0 4 -4 b.0 4 -4c.0 4 -4 d.5 4 1e.10 4 6Value of put at expiration InitialCostProfita10 6 4 b.5 6 -1c.0 6 -6 d.0 6 -6e.0 6 -618. A put option conveys the right to sell the underlying asset at the exercise price. A short position in a futures contract carries an obligation to sell the underlying asset at the futures price.19. A call option conveys the right to buy the underlying asset at the exercise price. A long position in a futures contract carries an obligation to buy the underlying asset at the futures price.CFA PROBLEMS(d)2. The equivalent taxable yield is: 6.75%/(1 - 0.34) = 10.23%3. (a) Writing a call entails unlimited potential losses as the stock price rises.4. a. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable bond is the same as the before-tax yield (5%), which is greater than the yield on the municipal bond.The taxable bond. The after-tax yield for the taxable bond is:0.05 ? (1 – 0.10) = 4.5%You are indifferent. The after-tax yield for the taxable bond is:0.05 ? (1 – 0.20) = 4.0%The after-tax yield is the same as that of the municipal bond.d. The municipal bond offers the higher after-tax yield for investors in tax brackets above 20%.If the after-tax yields are equal, then: 0.056 = 0.08 (1 – t)This implies that t = 0.30 =30%.。
英文版罗斯公司理财习题答案
CHAPTER 8MAKING CAPITAL INVESTMENT DECISIONSAnswers to Concepts Review and Critical Thinking Questions1. In this context, an opportunity cost refers to the value of anasset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today, not, for example, what it cost to acquire.2. a.Yes, the reduction in the sales of the company’s otherproducts, referred to as erosion, and should be treated as an incremental cash flow. These lost sales are included because they are a cost (a revenue reduction) that the firm must bear if it chooses to produce the new product.b. Yes, expenditures on plant and equipment should be treatedas incremental cash flows. These are costs of the new product line. However, if these expenditures have already occurred, they are sunk costs and are not included as incremental cash flows.c. No, the research and development costs should not be treatedas incremental cash flows. The costs of research and development undertaken on the product during the past 3 years are sunk costs and should not be included in the evaluation of the project. Decisions made and costs incurred in the past cannot be changed. They should not affect the decision to accept or reject the project.d. Yes, the annual depreciation expense should be treated as anincremental cash flow. Depreciation expense must be taken into account when calculating the cash flows related to a given project. While depreciation is not a cash expense that directly affects c ash flow, it decreases a firm’s netincome and hence, lowers its tax bill for the year. Because of this depreciation tax shield, the firm has more cash on hand at the end of the year than it would have had without expensing depreciation.e.No, dividend payments should not be treated as incrementalcash flows. A firm’s decision to pay or not pay dividends is independent of the decision to accept or reject any given investment project. For this reason, it is not an incremental cash flow to a given project. Dividend policy is discussed in more detail in later chapters.f.Yes, the resale value of plant and equipment at the end of aproject’s life should be treated as an incremental cashflow. The price at which the firm sells the equipment is a cash inflow, and any difference between the book value ofthe equipment and its sale price will create gains or losses that result in either a tax credit or liability.g.Yes, salary and medical costs for production employees hiredfor a project should be treated as incremental cash flows.The salaries of all personnel connected to the project must be included as costs of that project.3.I tem I is a relevant cost because the opportunity to sell theland is lost if the new golf club is produced. Item II is also relevant because the firm must take into account the erosion of sales of existing products when a new product is introduced. If the firm produces the new club, the earnings from the existing clubs will decrease, effectively creating a cost that must be included in the decision. Item III is not relevant because the costs of Research and Development are sunk costs. Decisions made in the past cannot be changed. They are not relevant to the production of the new clubs.4. For tax purposes, a firm would choose MACRS because it providesfor larger depreciation deductions earlier. These larger deductions reduce taxes, but have no other cash consequences.Notice that the choice between MACRS and straight-line is purely a time value issue; the total depreciation is the same;only the timing differs.5.It’s probably only a mild over-simplification. Currentliabilities will all be paid, presumably. The cash portion of current assets will be retrieved. Some receivables won’t be collected, and some inventory will not be sold, of course.Counterbalancing these losses is the fact that inventory sold above cost (and not replaced at the end of the project’s life) acts to increase working capital. These effects tend to offset one another.6.Management’s discretion to set the firm’s capital structureis applicable at the firm level. Since any one particular project could be financed entirely with equity, another project could be financed with debt, and the firm’s overall capital structure remains unchanged, financing costs are not relevant in the analysis of a project’s incremental cash flows according to the stand-alone principle.7. The EAC approach is appropriate when comparing mutuallyexclusive projects with different lives that will be replaced when they wear out. This type of analysis is necessary so that the projects have a common life span over which they can be compared; in effect, each project is assumed to exist over an infinite horizon of N-year repeating projects. Assuming that this type of analysis is valid implies that the project cash flows remain the same forever, thus ignoring the possible effects of, among other things: (1) inflation, (2) changing economic conditions, (3) the increasing unreliability of cash flow estimates that occur far into the future, and (4) the possible effects of future technology improvement that could alter the project cash flows.8. Depreciation is a non-cash expense, but it is tax-deductible onthe income statement. Thus depreciation causes taxes paid, an actual cash outflow, to be reduced by an amount equal to the depreciation tax shield, t c D. A reduction in taxes that would otherwise be paid is the same thing as a cash inflow, so the effects of the depreciation tax shield must be added in to get the total incremental aftertax cash flows.9. There are two particularly important considerations. The firstis erosion. Will the “essentialized”book simply displace copies of the existing book that would have otherwise been sold?This is of special concern given the lower price. The second consideration is competition. Will other publishers step in and produce such a product? If so, then any erosion is much less relevant. A particular concern to book publishers (and producers of a variety of other product types) is that the publisher only makes money from the sale of new books. Thus, it is important to examine whether the new book would displace sales of used books (good from the publisher’s perspective) or new books (not good). The concern arises any time there is an active market for used product.10.D efinitely. The damage to Porsche’s reputation is definitely afactor the company needed to consider. If the reputation was damaged, the company would have lost sales of its existing car lines.11.O ne company may be able to produce at lower incremental cost ormarket better. Also, of course, one of the two may have made a mistake!12.P orsche would recognize that the outsized profits would dwindleas more products come to market and competition becomes more intense.Solutions to Questions and ProblemsNOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.Basic1. Using the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = [($5 × 2,000 –($2 × 2,000)](1 –0.35) +0.35($10,000/5)OCF = $4,600So, the NPV of the project is:NPV = –$10,000 + $4,600(PVIFA17%,5)NPV = $4,7172. We will use the bottom-up approach to calculate the operatingcash flow for each year. We also must be sure to include the net working capital cash flows each year. So, the total cash flow each year will be:Year 1 Year 2 Year 3 Year 4 Sales Rs.7,000 Rs.7,000 Rs.7,000 Rs.7,000Costs 2,000 2,000 2,000 2,000Depreciation 2,500 2,500 2,500 2,500EBT Rs.2,500 Rs.2,500 Rs.2,500 Rs.2,500Tax 850 850 850 850Net income Rs.1,650 Rs.1,650 Rs.1,650 Rs.1,650OCF 0 Rs.4,150 Rs.4,150 Rs.4,150 Rs.4,150Capital spending –Rs.10,000 0 0 0 0NWC –200 –250 –300 –200 950 Incremental cashflow –Rs.10,200 Rs.3,900 Rs.3,850 Rs.3,950 Rs.5,100The NPV for the project is:NPV = –Rs.10,200 + Rs.3,900 / 1.10 + Rs.3,850 / 1.102+ Rs.3,950 / 1.103 + Rs.5,100 / 1.104NPV = Rs.2,978.333. U sing the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = (R2,400,000 – 960,000)(1 – 0.30) + 0.30(R2,700,000/3) OCF = R1,278,000So, the NPV of the project is:NPV = –R2,700,000 + R1,278,000(PVIFA15%,3)NPV = R217,961.704.T he cash outflow at the beginning of the project will increasebecause of the spending on NWC. At the end of the project, the company will recover the NWC, so it will be a cash inflow. The sale of the equipment will result in a cash inflow, but we also must account for the taxes which will be paid on this sale. So, the cash flows for each year of the project will be:Year Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,278,0002 1,278,0003 1,725,000 = R1,278,000 + 300,000 + 210,000 + (0 – 210,000)(.30)And the NPV of the project is:NPV = –R3,000,000 + R1,278,000(PVIFA15%,2) + (R1,725,000 / 1.153) NPV = R211,871.465. First we will calculate the annual depreciation for theequipment necessary for the project. The depreciation amount each year will be:Year 1 depreciation = R2.7M(0.3330) = R899,100Year 2 depreciation = R2.7M(0.4440) = R1,198,800Year 3 depreciation = R2.7M(0.1480) = R399,600So, the book value of the equipment at the end of three years, which will be the initial investment minus the accumulated depreciation, is:Book value in 3 years = R2.7M –(R899,100 + 1,198,800 + 399,600)Book value in 3 years = R202,500The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = R202,500 + (R202,500 – 210,000)(0.30) Aftertax salvage value = R207,750To calculate the OCF, we will use the tax shield approach, so the cash flow each year is:OCF = (Sales – Costs)(1 – t C) + t C DepreciationYear Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,277,730.00 = (R1,440,000)(.70) + 0.30(R899,100)2 1,367,640.00 = (R1,440,000)(.70) + 0.30(R1,198,800)3 1,635,630.00 = (R1,440,000)(.70) + 0.30(R399,600) + R207,750 + 300,000Remember to include the NWC cost in Year 0, and the recovery of the NWC at the end of the project. The NPV of the project with these assumptions is:NPV = – R3.0M + (R1,277,730/1.15) + (R1,367,640/1.152) +(R1,635,630/1.153)NPV = R220,655.206. First, we will calculate the annual depreciation of the newequipment. It will be:Annual depreciation charge = €925,000/5Annual depreciation charge = €185,000The aftertax salvage value of the equipment is:Aftertax salvage value = €90,000(1 – 0.35)Aftertax salvage value = €58,500Using the tax shield approach, the OCF is:OCF = €360,000(1 – 0.35) + 0.35(€185,000)OCF = €298,750Now we can find the project IRR. There is an unusual feature that is a part of this project. Accepting this project means that we will reduce NWC. This reduction in NWC is a cash inflow at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC. So, at the end of theproject, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. The IRR of the project is:NPV = 0 = –€925,000 + 125,000 + €298,750(PVIFA IRR%,5) + [(€58,500 – 125,000) / (1+IRR)5]IRR = 23.85%7. First, we will calculate the annual depreciation of the newequipment. It will be:Annual depreciation = £390,000/5Annual depreciation = £78,000Now, we calculate the aftertax salvage value. The aftertax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so:Aftertax salvage value = MV + (BV – MV)t cVery often, the book value of the equipment is zero as it is in this case. If the book value is zero, the equation for the aftertax salvage value becomes:Aftertax salvage value = MV + (0 – MV)t cAftertax salvage value = MV(1 – t c)We will use this equation to find the aftertax salvage value since we know the book value is zero. So, the aftertax salvage value is:Aftertax salvage value = £60,000(1 – 0.34)Aftertax salvage value = £39,600Using the tax shield approach, we find the OCF for the project is:OCF = £120,000(1 – 0.34) + 0.34(£78,000)OCF = £105,720Now we can find the project NPV. Notice that we include the NWC in the initial cash outlay. The recovery of the NWC occurs in Year 5, along with the aftertax salvage value.NPV = –£390,000 –28,000 + £105,720(PVIFA10%,5) + [(£39,600 + 28,000) / 1.15]NPV = £24,736.268. To find the BV at the end of four years, we need to find theaccumulated depreciation for the first four years. We could calculate a table with the depreciation each year, but an easier way is to add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:BV4 = $9,300,000 – 9,300,000(0.2000 + 0.3200 + 0.1920 + 0.1150) BV4 = $1,608,900The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = $2,100,000 + ($1,608,900 –2,100,000)(.40)Aftertax salvage value = $1,903,5609. We will begin by calculating the initial cash outlay, that is,the cash flow at Time 0. To undertake the project, we will have to purchase the equipment and increase net working capital. So, the cash outlay today for the project will be:Equipment –€2,000,000NWC –100,000Total –€2,100,000Using the bottom-up approach to calculating the operating cash flow, we find the operating cash flow each year will be:Sales €1,200,000Costs 300,000Depreciation 500,000EBT €400,000Tax 140,000Net income €260,000The operating cash flow is:OCF = Net income + DepreciationOCF = €260,000 + 500,000OCF = €760,000To find the NPV of the project, we add the present value of the project cash flows. We must be sure to add back the net working capital at the end of the project life, since we are assuming the net working capital will be recovered. So, the project NPV is:NPV = –€2,100,000 + €760,000(PVIFA14%,4) + €100,000 / 1.144NPV = €173,629.3810.W e will need the aftertax salvage value of the equipment tocompute the EAC. Even though the equipment for each product hasa different initial cost, both have the same salvage value. Theaftertax salvage value for both is:Both cases: aftertax salvage value = $20,000(1 –0.35) = $13,000To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is:OCF = – $34,000(1 – 0.35) + 0.35($210,000/3) = $2,400NPV = –$210,000 + $2,400(PVIFA14%,3) + ($13,000/1.143) = –$195,653.45EAC = –$195,653.45 / (PVIFA14%,3) = –$84,274.10And the OCF and NPV for Techron II is:OCF = – $23,000(1 – 0.35) + 0.35($320,000/5) = $7,450NPV = –$320,000 + $7,450(PVIFA14%,5) + ($13,000/1.145) = –$287,671.75EAC = –$287,671.75 / (PVIFA14%,5) = –$83,794.05The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost.Intermediate11.F irst, we will calculate the depreciation each year, which willbe:D1 = ¥480,000(0.2000) = ¥96,000D2 = ¥480,000(0.3200) = ¥153,600D3 = ¥480,000(0.1920) = ¥92,160D4 = ¥480,000(0.1150) = ¥55,200The book value of the equipment at the end of the project is:BV4= ¥480,000 –(¥96,000 + 153,600 + 92,160 + 55,200) = ¥83,040The asset is sold at a loss to book value, so this creates a tax refund.After-tax salvage value = ¥70,000 + (¥83,040 – 70,000)(0.35) = ¥74,564.00So, the OCF for each year will be:OCF1 = ¥160,000(1 – 0.35) + 0.35(¥96,000) = ¥137,600.00OCF2 = ¥160,000(1 – 0.35) + 0.35(¥153,600) = ¥157,760.00OCF3 = ¥160,000(1 – 0.35) + 0.35(¥92,160) = ¥136,256.00OCF4 = ¥160,000(1 – 0.35) + 0.35(¥55,200) = ¥123,320.00Now we have all the necessary information to calculate the project NPV. We need to be careful with the NWC in this project.Notice the project requires ¥20,000 of NWC at the beginning, and ¥3,000 more in NWC each successive year. We will subtract the ¥20,000 from the initial cash flow, and subtract ¥3,000 each year from the OCF to account for this spending. In Year 4, we will add back the total spent on NWC, which is ¥29,000. The ¥3,000 spent on NWC capital during Year 4 is irrelevant. Why?Well, during this year the project required an additional ¥3,000, but we would get the money back immediately. So, thenet cash flow for additional NWC would be zero. With all this, the equation for the NPV of the project is:NPV = –¥480,000 –20,000 + (¥137,600 –3,000)/1.14 + (¥157,760 – 3,000)/1.142+ (¥136,256 –3,000)/1.143+ (¥123,320 + 29,000 + 74,564)/1.144NPV = –¥38,569.4812.I f we are trying to decide between two projects that will notbe replaced when they wear out, the proper capital budgeting method to use is NPV. Both projects only have costs associated with them, not sales, so we will use these to calculate the NPV of each project. Using the tax shield approach to calculate the OCF, the NPV of System A is:OCF A = –元120,000(1 – 0.34) + 0.34(元430,000/4)OCF A = –元42,650NPV A = –元430,000 –元42,650(PVIFA20%,4)NPV A = –元540,409.53And the NPV of System B is:OCF B = –元80,000(1 – 0.34) + 0.34(元540,000/6)OCF B = –元22,200NPV B = –元540,000 –元22,200(PVIFA20%,6)NPV B = –元613,826.32If the system will not be replaced when it wears out, then System A should be chosen, because it has the more positive NPV.13.If the equipment will be replaced at the end of its useful life,the correct capital budgeting technique is EAC. Using the NPVs we calculated in the previous problem, the EAC for each system is:EAC A = –元540,409.53 / (PVIFA20%,4)EAC A = –元208,754.32EAC B = –元613,826.32 / (PVIFA20%,6)EAC B = –元184,581.10If the conveyor belt system will be continually replaced, we should choose System B since it has the more positive NPV.14.S ince we need to calculate the EAC for each machine, sales areirrelevant. EAC only uses the costs of operating the equipment, not the sales. Using the bottom up approach, or net income plus depreciation, method to calculate OCF, we get:Machine A Machine BVariable costs –₪3,150,000 –₪2,700,000Fixed costs –150,000 –100,000Depreciation –350,000 –500,000EBT –₪3,650,000 –₪3,300,000Tax 1,277,500 1,155,000Net income –₪2,372,500 –₪2,145,000+ Depreciation 350,000 500,000OCF –₪2,022,500 –₪1,645,000The NPV and EAC for Machine A is:NPV A = –₪2,100,000 –₪2,022,500(PVIFA10%,6) NPV A = –₪10,908,514.76EAC A = –₪10,908,514.76 / (PVIFA10%,6)EAC A = –₪2,504,675.50And the NPV and EAC for Machine B is:NPV B = –₪4,500,000 – 1,645,000(PVIFA10%,9)NPV B = –₪13,973,594.18EAC B = –₪13,973,594.18 / (PVIFA10%,9)EAC B = –₪2,426,382.43You should choose Machine B since it has a more positive EAC.15.W hen we are dealing with nominal cash flows, we must be carefulto discount cash flows at the nominal interest rate, and we must discount real cash flows using the real interest rate.Project A’s cash flows are in real terms, so we need to find the real interest rate. Using the Fisher equation, the real interest rate is:1 + R = (1 + r)(1 + h)1.15 = (1 + r)(1 + .04)r = .1058 or 10.58%So, the NPV of Project A’s real cash flows, discounting at the real interest rate, is:NPV = –฿40,000 + ฿20,000 / 1.1058 + ฿15,000 / 1.10582 + ฿15,000 / 1.10583NPV = ฿1,448.88Project B’s cash flow are in nominal terms, so the NPV discount at the nominal interest rate is:NPV = –฿50,000 + ฿10,000 / 1.15 + ฿20,000 / 1.152+ ฿40,000 /1.153NPV = ฿119.17We should accept Project A if the projects are mutually exclusive since it has the highest NPV.16.T o determine the value of a firm, we can simply find thepre sent value of the firm’s future cash flows. No depreciation is given, so we can assume depreciation is zero. Using the tax shield approach, we can find the present value of the aftertax revenues, and the present value of the aftertax costs. The required return, growth rates, price, and costs are all given in real terms. Subtracting the costs from the revenues will give us the value of the firm’s cash flows. We must calculate the present value of each separately since each is growing at a different rate. First, we will find the present value of the revenues. The revenues in year 1 will be the number of bottles sold, times the price per bottle, or:Aftertax revenue in year 1 in real terms = (2,000,000 ×$1.50)(1 – 0.34)Aftertax revenue in year 1 in real terms = $1,650,000Revenues will grow at six percent per year in real terms forever. Apply the growing perpetuity formula, we find the present value of the revenues is:PV of revenues = C1 / (R–g)PV of revenues = $1,650,000 / (0.10 – 0.06)PV of revenues = $41,250,000The real aftertax costs in year 1 will be:Aftertax costs in year 1 in real terms = (2,000,000 ×$0.65)(1 – 0.34)Aftertax costs in year 1 in real terms = $858,000Costs will grow at five percent per year in real terms forever.Applying the growing perpetuity formula, we find the present value of the costs is:PV of costs = C1 / (R–g)PV of costs = $858,000 / (0.10 – 0.05)PV of costs = $17,160,000Now we can find the value of the firm, which is:Value of the firm = PV of revenues – PV of costsValue of the firm = $41,250,000 – 17,160,000Value of the firm = $24,090,00017.To calculate the nominal cash flows, we simple increase eachitem in the income statement by the inflation rate, except for depreciation. Depreciation is a nominal cash flow, so it does not need to be adjusted for inflation in nominal cash flow analysis. Since the resale value is given in nominal terms as of the end of year 5, it does not need to be adjusted for inflation. Also, no inflation adjustment is needed for either the depreciation charge or the recovery of net working capital since these items are already expressed in nominal terms. Note that an increase in required net working capital is a negative cash flow whereas a decrease in required net working capital isa positive cash flow. The nominal aftertax salvage value is:Market price $30,000Tax on sale –10,200Aftertax salvage value $19,800Remember, to calculate the taxes paid (or tax credit) on the salvage value, we take the book value minus the market value, times the tax rate, which, in this case, would be:Taxes on salvage value = (BV – MV)t CTaxes on salvage value = ($0 – 30,000)(.34)Taxes on salvage value = –$10,200Now we can find the nominal cash flows each year using the income statement. Doing so, we find:Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales $200,000 $206,000 $212,180 $218,545 $225,102Expenses 50,000 51,500 53,045 54,636 56,275Depreciation 50,000 50,000 50,000 50,000 50,000EBT $100,000 $104,500 $109,135 $113,909 $118,826Tax 34,000 35,530 37,106 38,729 40,401Net income $66,000 $68,970 $72,029 $75,180 $78,425OCF $116,000 $118,970 $122,029 $125,180 $128,425Capital spending –$250,000 $19,800NWC –10,000 10,000Total cash flow –$260,000 $116,000 $118,970 $122,029 $125,180 $158,22518.T he present value of the company is the present value of thefuture cash flows generated by the company. Here we have real cash flows, a real interest rate, and a real growth rate. The cash flows are a growing perpetuity, with a negative growth rate. Using the growing perpetuity equation, the present value of the cash flows are:PV = C1 / (R–g)PV = $120,000 / [.11 – (–.07)]PV = $666,666.6719.T o find the EAC, we first need to calculate the NPV of theincremental cash flows. We will begin with the aftertax salvage value, which is:Taxes on salvage value = (BV – MV)t CTaxes on salvage value = (€0 – 10,000)(.34)Taxes on salvage value = –€3,400Market price €10,000Tax on sale –3,400Aftertax salvage value €6,600Now we can find the operating cash flows. Using the tax shield approach, the operating cash flow each year will be:OCF = –€5,000(1 – 0.34) + 0.34(€45,000/3)OCF = €1,800So, the NPV of the cost of the decision to buy is:NPV = –€45,000 + €1,800(PVIFA12%,3) + (€6,600/1.123)NPV = –€35,987.95In order to calculate the equivalent annual cost, set the NPV of the equipment equal to an annuity with the same economic life. Since the project has an economic life of three years and is discounted at 12 percent, set the NPV equal to a three-year annuity, discounted at 12 percent.EAC = –€35,987.95 / (PVIFA12%,3)EAC = –€14,979.8020.W e will find the EAC of the EVF first. There are no taxes sincethe university is tax-exempt, so the maintenance costs are the operating cash flows. The NPV of the decision to buy one EVF is:NPV = –₩8,000 –₩2,000(PVIFA14%,4)NPV = –₩13,827.42In order to calculate the equivalent annual cost, set the NPV of the equipment equal to an annuity with the same economic life. Since the project has an economic life of four years and is discounted at 14 percent, set the NPV equal to a three-year annuity, discounted at 14 percent. So, the EAC per unit is:EAC = –₩13,827.42 / (PVIFA14%,4)EAC = –₩4,745.64Since the university must buy 10 of the word processors, the total EAC of the decision to buy the EVF word processor is:Total EAC = 10(–₩4,745.64)Total EAC = –₩47,456.38Note, we could have found the total EAC for this decision by multiplying the initial cost by the number of word processors needed, and multiplying the annual maintenance cost of each by the same number. We would have arrived at the same EAC.We can find the EAC of the AEH word processors using the same method, but we need to include the salvage value as well. Thereare no taxes on the salvage value since the university is tax-exempt, so the NPV of buying one AEH will be:NPV = –₩5,000 –₩2,500(PVIFA14%,3) + (₩500/1.143)NPV = –₩10,466.59So, the EAC per machine is:EAC = –₩10,466.59 / (PVIFA14%,3)EAC = –₩4,508.29Since the university must buy 11 of the word processors, the total EAC of the decision to buy the AEH word processor is:Total EAC = 11(–₩4,508.29)Total EAC = –₩49,591.21The university should buy the EVF word processors since the EAC is lower. Notice that the EAC of the AEH is lower on a per machine basis, but because the university needs more of these word processors, the total EAC is higher.21.W e will calculate the aftertax salvage value first. Theaftertax salvage value of the equipment will be:Taxes on salvage value = (BV – MV)t CTaxes on salvage value = (₫0 – 100,000)(.34)Taxes on salvage value = –₫34,000Market price ₫100,000Tax on sale –34,000Aftertax salvage value ₫66,000Next, we will calculate the initial cash outlay, that is, the cash flow at Time 0. To undertake the project, we will have to purchase the equipment. The new project will decrease the net working capital, so this is a cash inflow at the beginning of the project. So, the cash outlay today for the project will be:Equipment –₫500,000NWC 100,000Total –₫400,000Now we can calculate the operating cash flow each year for the project. Using the bottom up approach, the operating cash flow will be:Saved salaries ₫120,000Depreciation 100,000EBT ₫20,000。
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CHAPTER 8AN INTRODUCTION TO PORTFOLIO MANAGEMENTTRUE/FALSE QUESTIONS(t) 1 Risk is defined as the uncertainty of future outcomes.(t) 2 A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.(t) 3 The yield spread between yields on AAA bonds and BAA bonds is evidence that investors are risk averse.(t) 4 Standardizing the covariance by the individual standard deviation yields the correlation coefficient.(t) 5 The covariance is a measure of the degree to which two variables (e.g., rates of return) move together over time relative to their means.(f) 6 For a two stock portfolio containing Stocks i and j, the correlationcoefficient of returns (r i,j) is equal to the square root of the covariance (cov i,j).(f) 7 To reduce the standard deviation of a portfolio it is necessary to increasethe relative weight of assets with low volatility (small standarddeviation of returns).(t) 8 Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.(f) 9 A basic assumption of portfolio theory is that an investor would want tomaximize risk subject to a given level of return.(t) 10 Most investors hold a diversified portfolio in order to reduce portfolio risk.(f) 11 Most assets of the same type have negative covariances of returns with each other.MULTIPLE CHOICE QUESTIONS(a) 1 The optimal portfolio is identified at the point of tangency between theefficient frontier and thea)highest possible utility curve.b)lowest possible utility curve.c)middle range utility curve.d)steepest utility curve.e)flattest utility curve.379(d) 2 An individual investor’s utility curves specify the tradeoffs he or she iswilling to make betweena)high risk and low risk assets.b)high return and low return assets.c)covariance and correlation.d)return and risk.e)efficient portfolios.(c) 3 As the correlation coefficient between two assets decreases, the shape ofthe efficient frontiera)approaches a horizontal straight line.b)bends out.c)bends in.d)approaches a vertical straight line.e)none of the above.(d) 4 A portfolio manager is considering adding another security to hisportfolio. The correlations of the 5 alternatives available are listed below. Whichsecuritywould enable the highest level of risk diversificationa)0.0b)0.25c)-0.25d)-0.75e) 1.0(b) 5 A positive covariance between two variables indicates thata)the two variables move in different directions.b)the two variables move in the same direction.c)the two variables are low risk.d)the two variables are high risk.e)the two variables are risk free.(c) 6 A positive relationship between expected return and expected risk isconsistent witha)investors being risk seekers.b)investors being risk avoiders.c)investors being risk averse.d)all of the above.e)none of the above.380(d) 7 What information must you input to a computer program in order to derivethe portfolios that make up the efficient frontiera)Expected returns, covariances and correlations.b)Standard deviations, variances and covariances.c)Expected returns, standard deviations and variances.d)Expected returns, variances and correlations.e)Covariances, correlations and variances.(d) 8 The Markowitz model is based on several assumptions regarding investorbehavior. Which of the following is an assumption of the Markowitz model?a)Investors consider investment alternative as being represented by a jointprobability distribution of expected returns over some holding period.b)Investors minimize one-period expected utility.c)Investors estimate the risk of the portfolio on the basis of their utilityfunctions.d)Investors base decisions solely on expected return and risk.e)None of the above.(a) 9 As the correlation coefficient between two assets increases, the shape ofthe efficient frontiera)approaches a horizontal straight line.b)bends out.c)bends in.d)approaches a vertical straight line.e)none of the above.(d) 10 The probability of an adverse outcome is the definition of:a)Statistics.b)Variance.c)Random.d)Risk.e)Semivariance.(c) 11 Which of the following is a measure of risk?a)Range of standard deviationsb)Expected returnc)Standard deviationd)Covariancee)Correlation381(b) 12 Semivariance, when applied to portfolio theory, is concerned withthea)Square root of deviations from the mean.b)Deviations below the mean.c)Deviations above the mean.d)All deviations (above and below the mean).e)Summation of the squared deviations from the mean.(a) 13 With low, zero or negative correlations it is possible to derive portfoliosthat havea)Lower risk than the individual securities in the portfolio.b)Lower risk than the highest risk individual security in the portfolio.c)Higher risk than the individual securities that make up the portfolio.d)Higher risk than the highest risk individual security in the portfolio.e)None of the above.(d) 14 Which of the following statements are correlation coefficient isfalse?a)The values range between -1 to +1.b) A value of +1 implies that the returns for the two stocks move together in acompletely linear manner.c) A value of -1 implies that the returns move in a completely opposite direction.d) A value of zero means that the returns are zero.e)None of the above (that is, all statements are true)(a) 15 In a two stock portfolio, if the correlation coefficient between two stockswere to decrease over time everything else remaining constant the portfolio's riskwoulda)Decrease.b)Remain constant.c)Increase.d)Fluctuate positively and negatively.e)Be a negative value.(d) 16 Given the following correlations between pairs of stocks, a portfolioconstructed from which pair will have the lowest standard deviation?Correl(A,B) = 0, Correl(C,D) = 1, Correl(E,F) = 0.75, Correl(G,H) = -0.75, Correl(I,J) = -0.50.a)Pair A,Bb)Pair C,Dc)Pair E,F382d)Pair G,He)Pair I,J(c) 17 Given a portfolio of stocks the envelope curve containing the set of bestpossible combinations is known as thea)Efficient portfolio.b)Utility curve.c)Efficient frontier.d)Last frontier.e)Capital asset pricing model.(d) 18 Estimation error refers to potential errors that arise from estimatinga)Expected security returns.b)Standard deviations of expected returns.c)Correlations of expected returns.d)All of the above.e)None of the above.(a) 19 A portfolio is considered to be efficient if:a)No other portfolio offers higher expected returns with the same risk.b)No other portfolio offers lower risk with lower expected return.c)There is no portfolio with a higher return.d)There is no portfolio with lower risk.e)None of the aboveMULTIPLE CHOICE PROBLEMS(d) 1 Consider two securities, A and B. Security A and B have a correlationcoefficient of 0.65. Security A has standard deviation of 12, and security B hasstandard deviation of 25. Calculate the covariance between these two securities.a)300b)461.54c)261.54d)195e)200(a) 2 Calculate the expected return for a three asset portfolio with the followingAsset Exp. Ret. Std. Dev WeightA 0.0675 0.12 0.25B 0.1235 0.1675 0.35383C 0.1425 0.1835 0.40a)11.71%b)11.12%c)15.70%d)14.25%e) 6.75%.(c) 3 Given the following weights and expected security returns, calculate theexpected return for the portfolio.Weight Expected Return.20 .06.25 .08.30 .10.25 .12a).085b).090c).092d).097e)None of the above(d) 4 the standard deviation for stock A is 0.15 and for stock B, it is 0.20. Thecovariance between returns for these stocks is 0.01. The correlation coefficientbetween these two stocks is:a)-0.125b)0.195c)-0.285d)0.333e)0.405USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMSGiven: E(R1) = .10 E(R2) = .15E(SD1) = .03 E(SD2) = .05W1 = .30 W2 = .70(d) 5 Calculate the expected return of the two stock portfolio.a).105b).115c).125d).135384e)None of the above(c) 6 Calculate the expected standard deviation of the two stock portfolio whenthe correlation is 0.40.a).0016b).0160c).0395d).1558e).3950USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMSGiven the following information about two stocks:E(R1) = 0.12 E(R2) = 0.16E(SD1) = 0.08 E(SD2) = 0.15(a) 7 Calculate the expected return a two stock portfolio when w1 = 0.75.a)0.13b)0.136c)0.14d)0.125e)0.16(d) 8 Calculate the expected standard deviation of a two stock portfolio whenw1 = 0.75and the covariance between stock 1 and stock 2 is -0.009.a)0.1025b)0.0705c)0.0906d)0.0404e)0.0623(b) 9 Calculate the expected return a two stock portfolio when w1 = 0.60.a)0.13b)0.136c)0.14d)0.125e)0.16385(c) 10 Calculate the expected standard deviation of a two stock portfoliowhen w1 = 0.60and the covariance between stock 1 and stock 2 is 0.8.a)0.1025b)0.0705c)0.0906d)0.0404e)0.0623CHAPTER 8ANSWERS TO MULTIPLE CHOICE PROBLEMS1. Cov(A, B) = (0.65)(12)(25) = 1952. E(R) = (0.25)(0.0675) + (0.35)(0.1235) + (0.40)(0.1425) = 0.1171 or 11.71%3. E(R) = (0.20)(0.06) + (0.25)(0.08) + (0.30)(0.10) + (0.25)(0.12) = 0.092 or 9.2%4. Correlation = (0.01)(0.15 x 0.20) = 0.33335. E(R) = (.3 x .10) + (.7 x .15) = .1356. SD= [(.3)2(.03)2+ (.7)2(.05)2+ 2(.3)(.7)(.03)(.05)(.4)]1/2 = 0.039477. E(R) = (.75 x .12) + (.25 x .16) = 0.138. SD = [(.75)2(.04)2+ (.25)2(.06)2+ 2(.75)(.25)(-.0009)]1/2 = 0.04049. E(R) = (.60 x .12) + (.40 x .16) = 0.13610. SD= [(.6)2(.04)2+ (.4)2(.06)2+ 2(.6)(.4)(.8)]1/2 = 0.0906386。