SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
Problem 7
The following effects seem to suggest predictability within equity markets and thus
disprove the Efficient Market Hypothesis. However, consider the following:
a. Multi

SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 16: MANAGING BOND PORTFOLIOS
Problem 9
a.
(1)
Time until
Payment
(years)
(2)
Cash Flow
1
5
$10 million
$4 million
(3)
PV of CF
(Discount rate =
10%)
(4)
(5)
Weight
Column (1)
Column (4)
$9.09 million
$2.48 millio

SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 14: BOND PRICES AND YIELDS
Problem 8
The bond price will be lower. As time passes, the bond price, which is now above par
value, will approach par.
Problem 9
Yield to maturity: Using a financial calculator, enter

SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
Problem 4
a.
The expected cash flow is: (0.5 $70,000) + (0.5 200,000) = $135,000
With a risk premium of 8% over the risk-free rate of 6%, the required rate o

SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION
Problem 8
a.
From put-call parity:
C P S0
b.
X
50
4 50
$5.18
T
(1 rf )
1.10.25
Sell a straddle, i.e., sell a call and a put to realize premium income of:
$5.18 + $4 = $9.18
If

SOLUTIONS TO BKM 9th/10th EDITION
CHAPTER 9: THE CAPITAL ASSET PRICING MODEL
Problem 3
a.
False. = 0 implies E(r) = rf , not zero.
b.
False. Investors require a risk premium only for bearing systematic (undiversifiable or
market) risk. Total volatility in

CAPM
How are risk and return related?
Assumptions
In order to gain insight, we make some very
strong assumptions.
There is a long list of assumptions in the book.
These assumptions amount to
1) all investors want mean variance efficient
portfolios usi

BUFN 740 Capital Markets
Prof. Loewenstein
Review for Final Questions Part 1
1) You have $1000 to invest, but have decided to borrow an additional $500 at the riskfree rate of 5%. You then invest your $1000 plus the proceeds of your borrowing
into an inde

Fixed Income Securities
What is the difference between a
bond trader and a bond?
What is a Bond?
A bond is an IOU or, debt. Basically, the
borrower sells the bond to an investor.
Borrower is then obligated to make
specific payments on specific dates unti

Course Overview
This course will examine tools and techniques
for understanding the investment process.
Portfolio Theory
Asset Pricing Models
Efficient Markets
Equity
Fixed Income
Derivatives
Finance and the Economy
In corporate finance, we are concerned

Efficient Markets
As an active investment manager
it is important to understand the
source of superior performance.
Efficient Markets
One of the functions of a financial market
is to provide information to participants.
How informative are Prices?
Effic

Portfolio Theory
Modern Portfolio Theory really appeared
in the late 50s.
A key insight is that by diversifying your
investments you can optimize the riskreturn of your portfolio.
Example for Later
E[r]
Asset 1
10%
Asset 2
15%
Correlation Coefficient:

Prof. Loewenstein
Final Review Concepts
For the final exam you will be allowed an 8 x 11 sheet of notes. You may write
anything you want on both sides of the sheet. You should bring a calculator also. It is
important to show all your work. I generally ded

Options and Derivatives
The best for last!
Options
Options are important for many reasons.
Many corporations use options to hedge, for
example, currency exposure.
Options are primitive securities from which we
can price more elaborate derivatives.
Opt

National Cranberry Cooperative
1.) Briefly summarize major trends in the cranberry industry in 1996. What are the problems facing
receiving plant #1 (RP1)?
Major trends in the cranberry industry in 1996 are that the barrels per acre harvested has been
inc

At the time of the case would you have been long or short on Blockbuster? Explain.
In 2007 I would of gotten out of Blockbuster stock as soon as possible. First, they were slow to realize
the threat Netflix posed and did not even acknowledge it until 2004

Blaine Kitchenware, Inc. Case Study
1.) Do you believe Blaines current capital structure and payout policy are appropriate?
We believe that Blaines current capital structure and payout policy are inappropriate
given the industry trends, comparisons, and f

In order to meet the challenges facing Whole Foods, the organization will need to refocus
on how it became successful in the first place. Whole foods initial success occurred because it
offered a unique product to a niche market. They need to once again b