Chapter 3, End-of-Chapter Problems
Problem 3.
Suppose you short sell 100 shares of IBM, now selling at $120 per share.
a. What is the maximum possible loss?
b. What happens to the maximum loss if you simultaneously place a stop-buy order
at $128?
Problem

1
Practice Questions
Chapter 3- How Securities Are Traded
1. Which one of the following statements regarding orders is false?
A. A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
B. A limit sell order is

'age
via-
. To
jdilce.
The investor's degree of risk aversion is characterized by the slope of his or her indiffercm:c
curve. Indifference curves show, at any level of expected return and risk, the required risk premium for taking on one additional percen

Creating Value:
Optimization vs. Unoptimization
A requirement in completion of the
Investments and Securities Analysis course
Anthony DAlessandro
Karishma Kapoor
Stephanie Lorenzo

Topics to be covered
1. Bond basic terms
2. Special provisions, such as call, put, and convertibility
3. Given bond basic terms and discount rate, calculate bond price
4. Important relations of bond pricing
a. The implication of difference between coupon

IntroductiontoReturn,Riskand
theHistoricalRecord
1
Topics
Historical record
Introduction to interest rates
Expected return & standard deviation
Time series analysis of past rates of return
2
I.HistoricalRecord
3
Returnandriskgohandinhand
Average annual
ra

Example 1. Scenario-based approach to estimating mean and standard
deviation
Calculating average return, i.e. mean
State
Prob. of State r in State (%) Probabilityweighted r
(%)
Excellent
0.25
31
=0.25*31= 7.75
Good
0.45
14
=0.45*14= 6.30
Poor
0.25
-6.75
=

1
Chapter 14
Bond Prices and Yields
1. Of the following four investments, _ is considered the safest.
A. commercial paper
B. corporate bonds
C. U. S. Agency issues
D. Treasury bonds
E. Treasury bills
Only Treasury issues are insured by the U. S. governmen

ValuationofUPSCommonStock
ATopdownApproach
1
Contents
Investment Summary
Company Overview
Macroeconomic Analysis
Industry Analysis
The US economy
The global economy
Diesel price
Relative stock performance in recessions
ATA Truck Tonnage Index
Valuation
Va

weight
to the
m for a
. rate of
IIl1al interest rate
Inlcrest rate
lIve annual rate (EAR)
ual percentage rate (APR)
llcnd yield
(ree rate
premium
1
excess return
risk aversion
normal distribution
event tree
skew
kurtosis
value at risk (VaR)
expected short

Investments Quiz 3
1. What is the price you would pay for a 10-year to maturity zero-coupon U.S. government
bond and a 10-year to maturity 6% semi annual coupon U.S. government if both were priced
to yield 3%?
2. What is the price you would pay and yield

1. What percentage of their portfolio would you advise an investor to place in cash,
stocks and bonds and what is the complete portfolios expected return and risk, if they
wanted to (a) achieve a targeted return of 14% annually or (b) achieve a portfolio

1
Notes and formulas
Part I. Introduction
Chapter 3 How securities are traded
1. Type of orders (understand their differences)
a. Market order
b. Limited orders
b.i. Limited buy order
b.ii. Limited sell order
2. Buy on margin
a. Concept
b. Calculations ba

Introduction
1
Topics
Real assets versus financial assets
How securities are traded
2
I.RealAssetsversusFinancial
Assets
Section1.1
3
Realassets
Real assets contribute directly to the
productivity of the economy.
Tangible/physical assets, e.g. land, machi

CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
PROBLEM SETS
1.
The Fisher equation predicts that the nominal rate will equal the equilibrium
real rate plus the expected

CHAPTER 3: HOW SECURITIES ARE TRADED
CHAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS
1.
Answers to this problem will vary.
2.
The dealer sets the bid and asked price. Spreads should be higher on inactively traded
stocks and lower on actively traded stoc

CHAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
CHAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS
1.
(e)
2.
(b) A higher borrowing rate is a consequence of the risk of the borrowers default.
In perfect markets wi

CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
PROBLEM SETS
1.
(a) and (e).
2.
(a) and (c). After real estate is added to the portfolio, there are four asset classes
in the portfolio: stocks, bonds, cash and real estate. Portfolio

BehavioralFinanceand
TechnicalAnalysis
Chapter12
1
Topics
Introduction
A real example
2
I.Introduction
3
Technicalanalysis
Technical analysis attempts to exploit
recurring and predictable patterns in stock
prices.
Prices adjust gradually to a new equilibr

EquityValuationModels
DiscountedDividendModel
Chapter18
1
Topics
Fundamental analysis
Intrinsic value and market price
Dividend discount model
Constant growth model
Estimating dividend growth rate
Multistage growth model
2
I.FundamentalAnalysis
3
Fundamen

Investigating Portfolio Strategy
based on MACD
1
Contents
Motivation/Introduction
Develop the research question
Data
Definition of the key variable of interest
Descriptive statistics
Tests and results
Portfolio analysis
Stock-level Fama-MacBeth regression

EquityValuationModels
FreeCashFlowModel&P/ERatio
Chapter18
1
Topics
Free cash flow model
P/E Ratio
The model
Economics on the model
Caveats on the model
2
I.FreeCashFlowApproach
ReadSection18.5
3
Valuationofnondividendpaying
stocks
Rapidly growing firms d

BondBasicsandPricing
CHAPTER14
1
Topics
Bond basics
Basic terms
Special provisions on corporate bonds
Bond pricing
Generic formula
Pricing coupon bonds
Pricing zero-coupon bonds
2
Topics
Important relationships for bond pricing
Coupon rate, market interes

Determinants of Bond Yields
1
Major determinants
Maturity: The length of time before the
bond matures
Default risk: The risk of not receiving
coupon and principal payments
Tax effect: The tax status of the flows
Complex options: The existence of
provision