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 with no additional cost of default, this increment would equal the
CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
PROBLEM SETS 1. 2. (a) and (e). (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 variance now includes a variance te
CHAPTER 8: INDEX MODELS
PROBLEM SETS
1.
The advantage of the index model, compared to the Markowitz procedure, is the
vastly reduced number of estimates required. In addition, the large number of
estimates required for the Markowitz procedure can result i
CHAPTER 9: THE CAPITAL ASSET PRICING MODEL
PROBLEM SETS
1.
E(rp) = rf + p x [E(rM) - rf]
.16 = .06 + p X [.14 - .06] p = .10/.08 = 1.25
2.
If the securitys correlation coefficient with the market portfolio doubles (with all
other variables such as varianc
CHAPTER 10: ARBITRAGE PRICING THEORY
AND MULTIFACTOR MODELS OF RISK AND RETURN
PROBLEM SETS
1.
The revised estimate of the expected rate of return on the stock would be the old
estimate plus the sum of the products of the unexpected change in each factor
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
PROBLEM SETS
1.
The correlation coefficient between stock returns for two non-overlapping periods
should be zero. If not, one could use returns from one period to predict returns in
later periods and make abnorm
CHAPTER 13: EMPIRICAL EVIDENCE ON SECURITY RETURNS
PROBLEM SETS
1.
Even if the single-factor CCAPM (with a consumption-tracking portfolio used as
the index) performs better than the CAPM, it is still quite possible that the
consumption portfolio does not
CHAPTER 14: BOND PRICES AND YIELDS
PROBLEM SETS
1.
a) Catastrophe bond A bond that allows the issuer to transfer catastrophe risk
from the firm to the capital markets. Investors in these bonds receive a
compensation for taking on the risk in the form of h
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS.
1.
In general, the forward rate can be viewed as the sum of the markets expectation of
the future short rate plus a potential risk (or liquidity) premium. According to the
expectations theory
CHAPTER 16: MANAGING BOND PORTFOLIOS
PROBLEM SETS
1.
While it is true that short-term rates are more volatile than long-term rates, the
longer duration of the longer-term bonds makes their prices and their rates of
return more volatile. The higher duratio
CHAPTER 21: MACROECONOMIC & INDUSTRY ANALYSIS
PROBLEM SETS
1.
Expansionary (looser) monetary policy to lower interest rates would stimulate both investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, increased gov
CHAPTER 22: EQUITY VALUATION MODELS
PROBLEM SETS
1.
Theoretically, dividend discount models can be used to value the stock of rapidly
growing companies that do not currently pay dividends; in this scenario, we
would be valuing expected dividends in the re
CHAPTER 24: PORTFOLIO PERFORMANCE EVALUATION
PROBLEM SETS
1.
As established in the following result from the text, the Sharpe ratio depends on both
alpha for the portfolio ( P ) and the correlation between the portfolio and the market
index ():
E (rP r f
CHAPTER 25: INTERNATIONAL DIVERSIFICATION
PROBLEM SETS 1. "International Investing Raises Questions" was published in the Wall Street Journal in 1997. Some of the arguments presented in the article may no longer be compelling more than a decade later. For
CHAPTER 26: HEDGE FUNDS
PROBLEM SETS
1.
No, a market-neutral hedge fund would not be a good candidate for an investors
entire retirement portfolio because such a fund is not a diversified portfolio. The
term market-neutral refers to a portfolio position w
CHAPTER 27: THE THEORY OF
ACTIVE PORTFOLIO MANAGEMENT
PROBLEM SETS
1.
Views about the relative performance of bonds compared to stocks can have a
significant impact on how security analysis is conducted. For example, as a result
of a predicted decrease in
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 inflation rate. Hence, if the inflation rate increases
from 3% to
CHAPTER 4: MUTUAL FUNDS AND
OTHER INVESTMENT COMPANIES
PROBLEM SETS
1.
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 manager
CHAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS 1. 2. Answers to this problem will vary. The dealer sets the bid and asked price. Spreads should be higher on inactively traded stocks and lower on actively traded stocks.
3.
a.
In principle, potential los
CHAPTER3
BALANCESHEET:PRESENTINGANDANALYZING
RESOURCESANDFINANCING
Questions,Exercises,andProblems:AnswersandSolutions
3.1
Seethetextortheglossaryattheendofthebook.
3.2
Conservatism emphasizes the early recognition of losses and delayed
recognition of ga
CHAPTER 5
STATEMENT OF CASH FLOWS: REPORTING THE EFFECTS OF OPERATING, INVESTING, AND FINANCING ACTIVITIES ON CASH FLOWS Questions, Exercises, and Problems: Answers and Solutions 5.1 5.2 See the text or the glossary at the end of the book. One can critici