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    Investment Assign 1 - Questions

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    Yuhan KE
    This document contains investment questions from chapters 1, 3, 5, and 11 of the textbook Essentials of Investments. The questions cover topics such as: 1) Why some people invest in Treasury bills despite their lower average returns than stocks. 2) Calculating rates of return and margin requirements for short selling stocks or buying stocks on margin. 3) Determining optimal portfolio allocations to balance expected returns and risk. 4) Comparing the risk-return tradeoff of an actively managed fund to a passive index fund.

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    Investment Assign 1 - Questions

    Uploaded by

    Yuhan KE
    64 views4 pages
    This document contains investment questions from chapters 1, 3, 5, and 11 of the textbook Essentials of Investments. The questions cover topics such as: 1) Why some people invest in Treasury bills despite their lower average returns than stocks. 2) Calculating rates of return and margin requirements for short selling stocks or buying stocks on margin. 3) Determining optimal portfolio allocations to balance expected returns and risk. 4) Comparing the risk-return tradeoff of an actively managed fund to a passive index fund.

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    This document contains investment questions from chapters 1, 3, 5, and 11 of the textbook Essentials of Investments. The questions cover topics such as: 1) Why some people invest in Treasury bills despite their lower average returns than stocks. 2) Calculating rates of return and margin requirements for short selling stocks or buying stocks on margin. 3) Determining optimal portfolio allocations to balance expected returns and risk. 4) Comparing the risk-return tradeoff of an actively managed fund to a passive index fund.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    64 views4 pages

    Investment Assign 1 - Questions

    Uploaded by

    Yuhan KE
    This document contains investment questions from chapters 1, 3, 5, and 11 of the textbook Essentials of Investments. The questions cover topics such as: 1) Why some people invest in Treasury bills despite their lower average returns than stocks. 2) Calculating rates of return and margin requirements for short selling stocks or buying stocks on margin. 3) Determining optimal portfolio allocations to balance expected returns and risk. 4) Comparing the risk-return tradeoff of an actively managed fund to a passive index fund.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Investment Analysis and Portfolio Management

    Assignment 1

    Zvi Bodie, Alex Kane, and Alan J. Marcus. Essentials of Investments (11th Edition)

    Chapter 1

    Q21. The average rate of return on investments in large stocks has outpaced that on
    investments in Treasury bills by about 8% since 1926. Why, then, does anyone invest in
    Treasury bills?

    Chapter 3

    Q16. Old Economy Traders opened an account to short-sell 1,000 shares of Internet
    Dreams. The initial margin requirement was 50%. (The margin account pays no
    interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the
    stock has paid a dividend of $2 per share.

    a) What is the remaining margin in the account?


    b) If the maintenance margin requirement is 30%, will Old Economy receive a
    margin call?
    c) What is the rate of return on the investment?

    Q18. You are bullish on Telecom stock. The current market price is $50 per share, and
    you have $5,000 of your own to invest. You borrow an additional $5,000 from your
    broker at an interest rate of 8% per year and invest $10,000 in the stock.

    a) What will be your rate of return if the price of Telecom stock goes up by 10%
    during the next year? (Ignore the expected dividend.)
    b) How far does the price of Telecom stock have to fall for you to get a margin call if
    the maintenance margin is 30%? Assume the price fall happens immediately.
    Q19. You are bearish on Telecom and decide to sell short 100 shares at the current
    market price of $50 per share.

    a) How much in cash or securities must you put into your brokerage account if the
    brokers’ initial margin requirement is 50% of the value of the short position?
    b) How high can the price of the stock go before you get a margin call if the
    maintenance margin is 30% of the value of the short position?

    Q24. Suppose that XTel currently is selling at $40 per share. You buy 500 shares using
    $15,000 of your own money, borrowing the remainder of the purchase price from your
    broker. The rate on the margin loan is 8%.

    a) What is the percentage increase in the net worth of your brokerage account if the
    price of XTel immediately changes to (i) $44; (ii) $40; (iii) $36? What is the
    relationship between your percentage return and the percentage change in the
    price of XTel?
    b) If the maintenance margin is 25%, how low can XTel’s price fall before you get a
    margin call?
    c) How would your answer to (b) change if you had financed the initial purchase
    with only $10,000 of your own money?
    d) What is the rate of return on your margined position (assuming again that you
    invest $15,000 of your own money) if XTel is selling after one year at (i) $44; (ii)
    $40; (iii) $36? What is the relationship between your percentage return and the
    percentage change in the price of XTel? Assume that XTel pays no dividends.
    e) Continue to assume that a year has passed. How low can XTel’s price fall before
    you get a margin call?

    Q25. Suppose that you sell short 500 shares of XTel, currently selling for $40 per share,
    and give your broker $15,000 to establish your margin account.

    a) If you earn no interest on the funds in your margin account, what will be your rate
    of return after one year if XTel stock is selling at (i) $44; (ii) $40; (iii) $36?
    Assume that XTel pays no dividends.
    b) If the maintenance margin is 25%, how high can XTel’s price rise before you get
    a margin call?
    c) Redo parts (a) and (b), but now assume that XTel also has paid a year-end
    dividend of $1 per share. The prices in part (a) should be interpreted as ex-
    dividend, that is, prices after the dividend has been paid.
    Chapter 5

    Q11. Consider a risky portfolio, The end-of-year cash flow derived from the portfolio will
    be either $50,000 or $150,000, with equal probabilities of .5. The alternative riskless
    investment in T-bills pays 5%.

    a) If you require a risk premium of 10%, how much will you be willing to pay for the
    portfolio?
    b) Suppose the portfolio can be purchased for the amount you found in (a). What
    will the expected rate of return on the portfolio be?
    c) Now suppose you require a risk premium of 15%. What is the price you will be
    willing to pay now?
    d) Comparing your answers to (a) and (c), what do you conclude about the
    relationship between the required risk premium on a portfolio and the price at
    which the portfolio will sell?

    For Problems 12-15, assume that you manage a risky portfolio with an expected
    rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%.

    Q12. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill
    money market fund.

    a) What is the expected return and standard deviation of your client’s portfolio?
    b) Suppose your risky portfolio includes the following investments in the given
    proportions:
    Stock A 27%
    Stock B 33%
    Stock C 40%
    What are the investment proportions of your client’s overall portfolio, including
    the position in T-bills?
    c) What is the Sharpe ratio (S) of your risky portfolio and your client’s overall
    portfolio?
    d) Draw the CAL of your portfolio on an expected return/standard deviation
    diagram. What is the slope of the CAL? Show the position of your client on your
    find’s CAL.
    Q13. Suppose the same client in the previous problem decides to invest in your risky
    portfolio a proportion (y) of his total investment budget so that his overall portfolio will
    have an expected rate of return of 15%.

    a) What is the proportion y?


    b) What are your client’s investment proportions in your three stocks and in T-bills?
    c) What is the standard deviation of the rate of return on your client’s portfolio?

    Q14. Suppose the same client as in the previous problem refers to invest in your
    portfolio a proportion (y) that maximizes the expected return on the overall portfolio
    subject to the constraint that the overall portfolio’s standard deviation will not exceed
    20%.

    a) What is the investment proportion, y?


    b) What is the expected rate of return on the overall portfolio?

    Q15. You estimate that a passive portfolio invested to mimic the S&P 500 stock index
    provides an expected rate of return of 13% with a standard deviation of 25%. Draw the
    CML and your fund’s CAL on an expected return/standard deviation diagram.

    a) What is the slope of the CML?


    b) Characterize in one short paragraph the advantage of your fund over the index
    fund.

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