Managerial Economics

Activity Instructions
Read the following scenarios and complete the corresponding questions. Answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and demonstrate your knowledge.

Scenario 1 (length: as needed)
Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below. 

         US Foreign
Price Quantity Quantity
  $60    1,000     200
   55    1,500     250
   50    2,500     400
   45    4,000     600
   40    8,000   1,000
   35  14,000   2,000
   30  20,000   3,500
   25  30,000   7,000
   20  40,000  16,000
   15  55,000  35,000
   10  65,000  75,000
    5  77,000 150,000
  1. Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine?  What price should be charged to maximize profit?
  2. If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market?  What happens to the company’s profit?

Scenario 2 (length: as needed)
Apple (relatively) recently introduced different “versions” of the iPhone and iPad—in particular, currently Apple sells four versions of the iPad (iPad Air, iPad with Retina display, iPad mini with Retina display, and the iPad mini– http://www.apple.com/ipad/compare/). Note that the “top of the line” iPad and iPad mini are available with hard drives that range from 16GB to 128GB, and with the A7 chip. The other versions of the iPad and iPad mini are only available with a 16GB hard drive and feature slower chips (A6X and A5), but at a lower price than the top of the line models.

  1. Briefly explain why continuing to sell the older models when the newer generation’s models are introduced is an example of price discrimination. How does this help Apple reach a larger market? 
  2. Why are the lower tier models are currently only available with the 16GB hard drive, when previously (when they were the top of the line models) they were available with larger hard drives?
  3. When the iPad mini was first introduced, industry experts estimated that for every 4 million iPad minis that were sold, sales of the full-sized iPad would decrease by 1 million units. Assuming that is the case, explain why introducing the iPad mini was a good idea, even with some level of cannibalization.

Scenario 3 (length: as needed)
The marginal cost of producing a particular item is $2.50. Suppose a consumer is willing to purchase one item at $10, a second unit of that item at $9, a third unit of that item at $8, and so on. This means that the consumer’s demand schedule looks like:

Price Quantity
  $10  1
   9    2
   8    3
   7    4
   6    5
   5  6
   4  7
   3  8
   2  9
1 10
  1. If the firm must set a single price and sell all of its units, what price will it select to maximize profits? What will the profit be?
    1. Suppose the firm can apply a ‘volume discount’, pricing the first good at $10, pricing the second unit at $9, and pricing the third unit at $8, and so on. What is the smallest per-unit price the firm will want to offer? Assuming the volume discount ends at (or before) that price, what will the firm’s profit be?

Scenario 4 (length: as needed)
You are in charge of setting the optimal price for tickets for a local hockey team.  The demand schedule for hockey tickets is below:

Price Quantity
  $10    6,000
   11    5,900
   12    5,750
   13    5,500
   14    5,200
   15  4,900
   16  4,500
   17  4,000
   18  3,500
  1. What price maximizes the revenue from tickets? (Note, since marginal costs are assumed to be zero, this also maximizes profits)
    1. Each spectator also spends money parking and on concessions. The team owns both the nearby lots and the concession stands at the arena. The team has estimated that concession profits increase by $5 per person, and for every four spectators, one parking permit that is priced at $10 is purchased. With these new sources of revenue, what is the optimal ticket price?

Writing Requirements

Length: as indicated (Show your calculations where appropriate.)

1-inch margins

Double spaced

12-point Times New Roman font


This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 
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Managerial Economics

Activity Instructions

Answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your knowledge.

Scenario 1 (length: as needed)

Consider the market for corn in the United States. Suppose that the mandated percentage of ethanol in gasoline is increased and at the same time a corn blight destroys a significant portion of the corn crop.

1. Using a supply and demand diagram, show what happens to the equilibrium quantity and price of corn in the United States.

2. Explain why you are moving the curve(s) that you are?

3. Using a supply and demand diagram, show how the changes in the corn market would affect the market for wheat (a substitute for corn).

Scenario 2 (length: one paragraph)

Review the following resources:

•Website: https://research.stlouisfed.org/fred2/series/SPCS20RSA?cid=32261

•Website: https://research.stlouisfed.org/fred2/series/HSN1F

During the housing crash in 2008, housing prices fell, and the number of new houses sold in the United States also fell. The link to “New One Family Houses Sold” does not include existing house sales, but assume that existing house sales fell as well. Using the supply and demand analysis, would the observations of the housing market be explained by a shift of the demand curve, the supply curve, or both? Would the demand and supply increase, decrease or remain the same?

Scenario 3 (length: 0.5 page)

A pet store is considering adding an employee discount of 25% off anything in the store to the benefits the employees already receive. What are the long-run implications of adding this benefit to the wages that its employees receive? What would happen to the type of applicants that the pet store attracts?

Writing Requirements

•Length: as indicated (Show your calculations where appropriate.)

•Double spaced

•12-point Times New Roman font

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

1. Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

2. Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 
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Finance Investment Analysis

Please submit your assignment with complete answers and show calculations.

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FROM BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

LINK TO THE BOOK

http://dl.yazdanpress.com/BOOKS/MANAGEMENT/Investment_Analysis_and_Portfolio_Management(marked).pdf

Chapter 21 – questions 1,2,4,5,6,7,8, 10 (page 813).

1. We have futures contracts on Treasury bonds, but we do not have futures contracts on individual corporate bonds. We have cattle and hog futures but no chicken futures. Explain why the market has developed in this manner. What do you think are the most important characteristics for the success of a new futures contract concept?

2. “Hedgers trade price risk for basis risk.” What is meant by this statement? In particular, explain the concept of the basis in a hedge transaction and how forward and futures contracts can be selected to minimize risk.

4. A multinational corporation is about to embark on a major financial restructuring program. One critical stage will be the issuance of seven-year Eurobonds sometime within the next month. The CFO is concerned with recent instability in capital markets and with the particular event that market yields rise prior to issuance, forcing the corporation to pay a higher coupon rate on the bonds. It is decided to hedge that risk by selling 10-year Treasury note futures contracts. Notice that this is a classic cross hedge wherein 10-year Treasury notes are used to manage the risk of 7-year Eurobonds. Describe the nature of the basis risk in the hedge. In particular what specific events with respect to the shape of the Treasury yield curve and the Eurobond spread over Treasuries could render the hedge ineffective? In other words, under what circumstances would the hedge fail and make the corporation worse off?

5. You are the chief financial officer of a large multinational company, and six months from now you will be receiving a settlement payment of $50 million, which you plan to invest in 10-year U.S. Treasury bonds. Your interest rate forecast indicates that the yield curve will drop dramatically in the next two quarters. You are considering ways that you can guard against the possible decline in interest rates before you have the funds available to invest.

a. Briefly describe the hedging strategy using the 10-year Treasury note futures contract that would provide the best protection against this possible decline in yields.

b. Suppose that six months after you have entered into a futures contract as suggested in Part a, interest rates increases in the market actually increase substantially due to an unexpected change in monetary policy. Discuss how this increase in interest rates will affect the futures position you entered into.

c. Discuss whether you would have been better off (1) with the hedge position or (2) without the hedge position in this situation.

6. You own an equally weighted portfolio of 50 different stocks worth about $5,000,000. The stocks are from several different industries, and the portfolio is reasonably well diversified. Which do you think would provide you with the best overall hedge: a single position in an index futures or 50 different positions in futures contracts on the individual stocks? What are the most important factors to consider in making this decision?

7. Since their introduction, stock index futures contracts have become very popular and are now widely traded by finance professionals. Many factors, including (1) the current price of the underlying stock index, (2) the time to contract maturity, and (3) the dividends paid to the stocks in the underlying index, will affect the settlement price of a stock index futures contract. What is the fourth primary factor involved in stock index futures contract pricing, and how does this factor affect settlement prices?

8. It is often stated that a stock index arbitrage trade is easier to implement when the stock index futures contract price is above its theoretical level than when it is below that value. What institutional realities might make this statement true? Describe the steps involved in forming the arbitrage transaction in both circumstances. To the extent that the statement is valid, what does it suggest about the ability of the stock index futures market to remain efficient?

10. Explain why the currency of Country A, whose interest rates are twice as great as those in Country B, must trade at a forward discount. If there were no difference between the spot and forward exchange rates in this interest rate environment, what arbitrage trade could be constructed to take advantage of the situation?

Chapter 22 – questions 1,2,4,5,7, 10 (page 861).

1. Straddles have been described as “volatility plays.” Explain what this means for both long and short straddle positions. Given the fact that volatility is a primary factor in how options are priced, under what conditions might an investor who believes that markets are efficient ever want to create a straddle?

2. Put-call-forward parity and range forward positions both involve the purchase of a call option and the sale of a put option (or vice versa) on the same underlying asset. Describe the relationship between these two trading strategies. Is one a special case of the other?

4. In the Black-Scholes option pricing model, there are six factors that affect the value of call options on stocks. Three of these factors include (1) the current price of the underlying stock, (2) the time to maturity for the option contract, and (3) the dividend on the stock. Identify the remaining three factors, and explain how they affect the value of call options.

5. “Although options are risky investments, they are valued by virtue of their ability to convert the underlying asset into a synthetic risk-free security.” Explain what this statement means, being sure to describe the basic three-step process for valuing option contracts.

7. Describe the condition under which it would be rational to exercise both an American-style put and call stock option before the expiration date. In both cases, comment specifically on the role that dividends play.

10. On October 19, 1987, the stock market (as measured by the Dow Jones Industrial Average) lost almost one-quarter of its value in a single day. Nevertheless, some traders made a profit buying call options on the stock index and then liquidating their positions before the market closed. Explain how this is possible, assuming that it was not a case of the traders taking advantage of spurious upward ticks in stock prices.

 
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Finance Investment Analysis

Please submit your assignment with complete answers and show calculations.

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FROM BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

LINK TO THE BOOK

http://dl.yazdanpress.com/BOOKS/MANAGEMENT/Investment_Analysis_and_Portfolio_Management(marked).pdf

Chapter 18 – questions 1,2,4,5 (page 682).

1. Why does the present value equation appear to be more useful for the bond investor than for the common stock investor?

2. What are the important assumptions made when you calculate the promised yield to maturity? What are the assumptions when calculating promised YTC?

4. We discussed three alternative hypotheses to explain the term structure of interest rates. Briefly discuss the three hypotheses, and indicate which one you think best explains the alternative shapes of a yield curve.

5.         a. Explain what is meant by the term structure of interest rates. Explain the theoretical basis of an upward-sloping yield curve.

b. Explain the economic circumstances under which you would expect to see an inverted yield curve.

c. Define “real” rate of interest.

d. Over the past several years, fairly wide yield spreads between AAA corporates and

Treasuries have occasionally prevailed. Discuss the possible reasons for this. 

Problems 1) b and 2) a & b (page 685).

1. Four years ago, your firm issued $1,000 par, 25-year bonds, with a 7 percent coupon rate and a 10 percent call premium.

b. If these bonds are now called, what is the actual yield to call for the investors who originally purchased them at par?

2. Assume that you purchased an 8 percent, 20-year, $1,000 par, semiannual payment bond priced at $1,012.50 when it has 12 years remaining until maturity. Compute:

a. Its promised yield to maturity

b. Its yield to call if the bond is callable in three years with an 8 percent premium

Complete the following questions:

1) When will a bonds coupon rate, current yield and yield to maturity be equal to one another.

 2) When should an issuing firm exercise a call provision on its’ outstanding bonds? Why?

 3) IBM has a bond issue outstanding with 14 years to maturity. When originally issued the bond had a par value of $1,000, a stated coupon rate of 12% and 15 years to maturity. Currently, similar risk bonds in the market place are yielding 8%. What would you expect IBM’s bond to sell for today? Additionally, at such a price is the bond selling at a discount or a premium? Why?

 4) You are looking to purchase a zero coupon bond. The bond has 10 years until maturity and you require an 8% annual rate of return. What should you pay for this bond?

5) You just purchased a bond for $974.42 that matures in 5 Years. The bond was originally issued at par and had an annual coupon rate of 10%. Calculate the current yield and yield to maturity on the bond you just purchased.

 
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Finance Investment Analysis

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FROM BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

Chapter 17 – questions 1,2,3,4,5,6,7,8,9, 10.

  1. Explain the difference between calling a bond and a bond refunding.
  2. Identify the three most important determinants of the price of a bond. Describe the effect of each.
  3. Given a change in the level of interest rates, discuss how two major factors will influence the relative change in price for individual bonds.
  4. Briefly describe two indenture provisions that can affect the maturity of a bond.
  5. Explain the differences in taxation of income from municipal bonds, from U.S. Treasury bonds, and from corporate bonds.
  6. For several institutional participants in the bond market, explain what type of bond each is likely to purchase and why.
  7. Why should investors be aware of the trading volume for bonds in their portfolio?
  8. What is the purpose of bond ratings?
  9. Based on the data in Exhibit 17.2, discuss the makeup of the Japanese bond market and how and why it differs from the U.S. market. Find Exhibit 17.2 in the link below (page 596).
http://dl.yazdanpress.com/BOOKS/MANAGEMENT/Investment_Analysis_and_Portfolio_Management(marked).pdf
  1. Discuss the positives and negatives of investing in a government agency issue rather than a straight Treasure bond.
 
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Finance Investment Analysis

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FROM BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

Chapter 8 – questions 3,4,5,6,7 and 10

3  The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant? 100 words

4  What are the similarities and differences between the CML and SML as models of the risk-return trade-off? 100 words

5  While the capital asset pricing model (CAPM) has been widely used to analyze securities and manage portfolios for the past 50 years, it has also been widely criticized as providing too simple a view of risk. Describe three problems in relation to the definition and estimation of the beta measure in the CAPM that would support this criticism.150 words

6  You have been offered an opportunity to invest in one of the two fully diversified portfolios, Portfolio H and Portfolio L. While you know that the betas of these portfolios are identical, you only know that, on average, the stocks held in Portfolio H have a higher level of specific risk than those in Portfolio L. From what you know about the capital asset pricing model (CAPM), which portfolio should you invest in? Which portfolio should give you a higher expected return? 100 words

7  You have recently appointed chief investment officer of a major charitable foundation. Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bonds (40 percent). The foundation’s board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice is superficial. You decide a discussion of basic investment principles would be helpful.

                A  — Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management. 200 words

You believe that the addition of other asset classes to the endowment portfolio would improve the portfolio by reducing risk and enhancing return. You are aware that depressed conditions in U.S. real estate markets are providing opportunities for property acquisition at levels of expected return that are unusually high by historical standards. You believe that an investment in U.S. real estate would be both appropriate and timely, and have decided to recommend a 20 percent position be established with funds taken equally from stocks and bonds. Preliminary discussions revealed that several trustees believe real estate is too risky to include in the portfolio. The board chairman, however, has scheduled a special meeting for further discussion of the matter and has asked you to provide background information that will clarify the risk issue.

To assist you, the following expectational data have been developed:

Correlation Matrix
Assets Class Return Standard Deviation U.S. Stocks U.S. Bonds U.S. Real Estate U.S. T-Bills
U.S. Stocks 12.0% 21.0% 1.00      
U.S. Bonds 8.0 10.5 0.14 1.00    
U.S. Real State 12.0 9.0 -0.04 -0.03 1.00  
U.S. Treasury Bills 4.0 0.0 -0.05 -0.03 0.25 1.00

B — Explain the effect on both portfolio risk and return that would result from the addition of U.S. real estate. Include in your answer two reasons for any change you expect in portfolio risk. (Note: It is not necessary to compute expected risk and return.) 200 words

C — Your understanding of capital market theory causes you to doubt the validity of the expected return and risk for U.S. real estate. Justify your skepticism. 70 words

10  Some studies related to the efficient market hypothesis generated results that implied additional factors beyond beta should be considered to estimate expected returns. What are these other variables and why should they be considered? 150 words

Chapter 8 problems 5a and 5b (no need to plot them on the SML for 5b), and 6a,b,c .

5  Based on five years of monthly data, you derive the following information for the companies listed:

Company  ai (intercept) ∂i rim
Intel 0.22 12.10% 0.72
Ford 0.10 14.60 0.33
Anheuser Busch 0.17 7.60 0.55
Merck 0.05 10.20 0.60
S&P 500 0.00 5.50 1.00

A — Compute the beta coefficient for each stock.

B – Assume a risk-free rate of 8 percent and an expected return for the market portfolio of 15 percent, compute the expected (required) return for all the stocks.

6  The following are the historic returns for the Chelle Computer Company:

Year Chelle Computer General Index
1 37 15
2 9 13
3 -11 14
4 8 -9
5 11 12
6 4 9

Based on this information, compute the following:

A – The correlation coefficient between Chelle Computer and the General Index.

B – The standard deviation for the company and the index.

C – The beta for the Chelle Computer Company.

Chapter 10, complete questions 3,4,5,9, and 10

3  Besides comparing a company’s performance to its total industry, discuss what other comparisons should be considered within the industry. 200 words

4  How might a jewelry store and a grocery store differ in terms of asset turnover and profit margin? Would you expect their return on total assets to differ assuming equal business risk? Discuss. 100 words

5  Describe the components of business risk, and discuss how the components affect the variability of operating earnings (EBIT). 100 words

9  Why is the analysis of growth potential important to the common stockholder? Why is it important to the debt investor? 100 words

10  Discuss the general factors that determine the rate of growth of any economic unit. 150 words

 
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Finance Investment Analysis

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1   Discuss the rationale for expecting an efficient capital market. What factor would you look for to differentiate the market efficiency for two alternative stocks? 100 words

2  Define and discuss the weak-form EMH. Describe the two sets of tests used to examine the weak-from EMH. 100 words

3  Define and discuss the semistrong-form EMH. Describe the two sets of tests used to examine the semistrong-form EMH 100 words

4  What is meant by the term abnormal rate of return? 70 words

7  Describe the results of a study that supported the semistrong-form EMH. Discuss the nature of the test and specifically why the results support the hypothesis. 100 words

8  Describe the results of a study that did NOT support the semistrong-form EMH. Discuss the nature of the test and specifically why the results did not support the hypothesis. 100 words

10  Define and discuss the strong-form EMH. Why do some observers contend that the strong-form hypothesis really requires a perfect market in addition to an efficient market? BE SPECIFIC . 100 words

12 Describe the results of a study that did NOT support the strong-form EMH. Discuss the test involved and specifically why the results reported did not support the hypothesis. 70 words

14  Describe the general goal of behavioral finance. 100 words

16  What does the EMH imply for the use of technical analysis? 70 words

17  What does the EMH imply for fundamental analysis? Discuss specifically what it does not imply. 100 words

18  In a work of efficient capital markets, what do you have to do to be a superior analyst? How would you test whether an analyst was superior. 100 words

 
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Finance Investment Analysis

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Q 119/120

  1. Define market and briefly discuss the characteristics of a good market.
  • You own 100 shares of General Electric stock and you want to sell it because you need the money to make a down payment on a car. Assume there is absolutely no secondary market system in common stocks. How would you go about selling the stocks? Discuss what you would have to do to find a buyer, how long it might take, and the price you might receive.
  • Define liquidity and discuss the factors that contribute to it. Give examples of a liquid asset and an illiquid asset, and discuss why they are considered liquid and illiquid.
  • Define a primary and secondary market for securities and discuss how they differ. Discuss how the primary market is dependent on the secondary market.
  • Give an example of an initial public offering (IPO) in the primary market. Give an example of a seasoned equity issue in the primary market. Discuss which would involve greater risk to the buyer.
  • Find a story about a recent primary offering in The Wall Street Journal. Based on the information in the story, indicate the characteristics of the security sold and the major underwriters. How much new capital did the firm derived from the offering?
  • Briefly explain the difference between a competitive-bid underwriting and a negotiated underwriting.

10. Briefly define each of the following terms and give an example.

a. Market order

b. Limit order

c. Short sale

d. Stop loss order

11. Briefly discuss the two major functions for the NYSE specialist.

P120

2. Lauren has a margin account and deposits $50,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling at $35 per share.

a. How many shares can Lauren purchase using the maximum allowable margin?

b. What is Lauren’s profit (loss) if the price of Gentry’s stock

                                i. rises to $45?

                                ii. falls to $25?

3. Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at $20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sale. A year later you receive a $0.50 per share dividend and sell the stock for $27 a share. What is your rate of return on Francesca Industries?

5. You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is now selling for $45 a share.

a. You put in a stop loss order at $40. Discuss your reasoning for this action.

b. If the stock eventually declines in price to $30 a share, what would be your rate of return with and without the stop loss order?

Q140

2. What major factors must be considered when constructing a market index? Put another way, what characteristics differentiate indexes?

3. Explain how a market index is price weighted. In such a case, would you expect a $100 stock to be more important than a $25 stock? Give an example.

4. Explain how to compute a value-weighted index.

11. Why is it contended that bond-market indexes are more difficult to construct and maintain than stock-market indexes?

12. Suppose that Dow Jones Total Stock Market market-value-weighted index increased by 5 percent, whereas the Merrill Lynch-Dow Jones Capital Markets Index increased by 15 percent during the same period. What does this difference in results imply?

13. Suppose the Russell 1000 increased by 8 percent during the past year, whereas the Russell 2000 increased by 15 percent. Discuss the implication of these results.

 
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Finance Investment Analysis

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Q 26/27

  1. Discuss the overall purpose people have for investing. Define investment.

4. Discuss why you would expect the saving-borrowing pattern to differ by occupation (for example, for a doctor versus a plumber).

 7.   Discuss the three components of an investor’s required rate of return on an investment. 

8.   Discuss the two major factors that determine the market nominal risk-free rate (NRFR).Explain which of these factors would be more volatile over the business cycle. 

9.   Briefly discuss the five fundamental factors that influence the risk premium of an investment. 

10.   You own stock in the Gentry Company, and you read in the financial press that a recent bond offering has raised the firm’s debt/equity ratio from 35 percent to 55 percent. Discuss the effect of this change on the variability of the firm’s net income stream, other factors being constant. Discuss how this change would affect your required rate of return on the common stock of the Gentry Company.

12.   Explain why you would change your nominal required rate of return if you expected the rate of inflation to go from 0 (no inflation) to 4 percent. Give an example of what would happen if you did not change your required rate of return under these conditions. 

15.   Give an example of a liquid investment and an illiquid investment. Discuss why you con-sider each of them to be liquid or illiquid.

P27/28

1.   On February 1, you bought 100 shares of stock in the Francesca Corporation for $34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a share. Compute your    HPR    and   HPY    on this Francesca stock investment. 

3.   At the beginning of last year, you invested $4,000 in 80 shares of the Chang Corporation. During the year, Chang paid dividends of $5 per share. At the end of the year, you sold the 80 shares for $59 a share. Compute your total   HPY    on these shares and indicate how much was due to the price change and how much was due to the dividend income. 

4.   The rates of return computed in Problems 1, 2, and 3 are nominal rates of return. Assuming that the rate of inflation during the year was 4 percent, compute the real rates of return on these investments. Compute the real rates of return if the rate of inflation was 8 percent. 

6.   You are considering acquiring shares of common stock in the Madison Beer Corporation. Your rate of return expectations are as follows: 

MADISON BEER CORP.

Possible Rate of Return                   Probability
-0.10 0.30
0.00 0.10
0.10 0.30
0.25 0.30

Compute the expected return [E( R̭i )] on your investment in Madison Beer.

12.   Assume that the consensus required rate of return on common stocks is 14 percent. In addition, you read in   Fortune   that the expected rate of inflation is 5 percent and the estimated long-term real growth rate of the economy is 3 percent. What interest rate would you expect on U.S. government T-bills? What is the approximate risk premium for common stocks implied by these data?

 
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Finance Investment Analysis

*** Submit plagiarism check report with your assignment*** I will do this PART.

Essay:

  • 8-9 pages (approx. 300 words per page), not including title page or references page
  • Minimum of 5 library resources cited in your work and listed as reference.
  • MUST Submit Plagiarism Check Report. (I will do this Part)

Introduction Paragraph

This will examine the arguments that have been made for the bailout of American International Group (AIG).   

Activity Instructions

In an essay, address the following questions:

  • If AIG had been allowed to fail, what type of financial institutions would have been adversely affected?
  • Who benefited from the bailout of AIG? 
  • Do you think AIG should have been allowed to fail?  Explain your opinion.
  • Finally, for the sake of argument, assume that there are financial institutions that are “to big to fail”, should these institutions be forced to breakup?  Why or why not?

Explain your thoughts thoroughly using concepts from the related chapters and lectures

Writing Requirements (APA format)

•8-9 pages (approx. 300 words per page), not including title page or references page

•1-inch margins

•Double spaced

•12-point Times New Roman font

•Title page with topic and name of student

•References page (minimum of 5 resources)

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses, applying economic reasoning. In addition, grammar, usage, spelling and mechanics will contribute to a portion of your grade.

Some Resources

Class BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

LINK TO THE BOOK

http://dl.yazdanpress.com/BOOKS/MANAGEMENT/Investment_Analysis_and_Portfolio_Management(marked).pdf

Link to Articles

http://www.wsj.com/articles/SB122156561931242905
http://useconomy.about.com/od/criticalssues/tp/AIG_Bailout.htm
http://www.wsj.com/articles/SB122156561931242905
http://content.time.com/time/business/article/0,8599,1841699,00.html
http://www.ibtimes.com/aig-trial-geithner-said-bailout-was-necessary-avoid-catastrophe-1700713
http://thinkbynumbers.org/government-spending/corporate-welfare/aig-bailout-details/
http://www.usnews.com/news/blogs/rick-newman/2012/09/10/why-the-aig-bailout-worked
 
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