Chapter 01 - The Investment Environment
C HAPTER 1: THE INVESTMENT ENVIRONMENT
PROBLEM SETS
1.
Ultimately, it is true that real assets determine the material well being of an economy.
Nevertheless, individuals can benefit when financial engineering create
Chapter 14 - Bond Prices and Yields
C HAPTER 14: BOND PRICES AND YIELDS
PROBLEM SETS
1.
The bond callable at 105 should sell at a lower price because the call provision is more
valuable to the firm. Therefore, its yield to maturity should be higher.
2.
Ze
Chapter 19 - Financial Statement Analysis
C HAPTER 19: FINANCIAL STATEMENT ANALYSIS
PROBLEM SETS
1.
The major difference in approach of international financial reporting standards and U.S.
GAAP accounting stems from the difference between principles and r
Chapter 16 - Managing Bond Portfolios
C HAPTER 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 r
Chapter 18 - Equity Valuation Models
C HAPTER 18: 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 b
Chapter 17 - Macroeconomic and Industry Analysis
C HAPTER 17: MACROECONOMIC AND INDUSTRY ANALYSIS
PROBLEM SETS
1.
Expansionary (looser) monetary policy to lower interest rates would stimulate both
investment and expenditures on consumer durables. Expansio
Chapter 20 - Options Markets: Introduction
C HAPTER 20: OPTIONS MARKETS: INTRODUCTION
PROBLEM SETS
1.
Options provide numerous opportunities to modify the risk profile of a portfolio. The
simplest example of an option strategy that increases risk is inves
Chapter 23 - Futures, Swaps, and Risk Management
C HAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
PROBLEM SETS
1.
In formulating a hedge position, a stocks beta and a bonds duration are used similarly to
determine the expected percentage gain or loss in t
Chapter 22 - Futures Markets
C HAPTER 22: FUTURES MARKETS
PROBLEM SETS
1.
There is little hedging or speculative demand for cement futures, since cement prices are
fairly stable and predictable. The trading activity necessary to support the futures market
Chapter 21 - Option Valuation
C HAPTER 21: OPTION VALUATION
PROBLEM SETS
1.
The value of a put option also increases with the volatility of the stock. We see this from
the put-call parity theorem as follows:
P = C S 0 + PV(X) + PV(Dividends)
Given a value
Chapter 27 - The Theory of Active Portfolio Management
C HAPTER 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 conduc
Chapter 25 - International Diversification
C HAPTER 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 b
Chapter 26 - Hedge Funds
C HAPTER 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 marketneutral refers
Chapter 24 - Portfolio Performance Evaluation
C HAPTER 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 th
Chapter 15 - The Term Structure of Interest Rates
C HAPTER 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 liquid
Chapter 13 - Empirical Evidence on Security Returns
C HAPTER 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 qu
Chapter 02 - Asset Classes and Financial Instruments
C HAPTER 2: ASSET CLASSES AND
FINANCIAL INSTRUMENTS
PROBLEM SETS
1.
Preferred stock is like long-term debt in that it typically promises a fixed payment each
year. In this way, it is a perpetuity. Prefe
Chapter 03 - How Securities are Traded
C HAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS
1.
Answers to this problem will vary.
2.
The SuperDot system expedites the flow of orders from exchange members to the
specialists. It allows members to send compute
Chapter 04 - Mutual Funds and Other Investment Companies
C HAPTER 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
Chapter 05 - Learning About Return and Risk from the Historical Record
C HAPTER 5: LEARNING ABOUT RETURN AND RISK
FROM THE HISTORICAL RECORD
PROBLEM SETS
1.
The Fisher equation predicts that the nominal rate will equal the equilibrium real rate
plus the e
Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
23.
For y to be less than 1.0 (so that the investor is a lender), risk aversion (A) must be
large enough such that:
y
E(rM ) rf
A 2
M
1
A
0.13 0.05
0.25 2
1.28
For y to be greater than 1.0
Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
C HAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS
1.
(e)
2.
(b) A higher borrowing is a consequence of the risk of the borrowers default. In perfect
markets with
Chapter 07 - Optimal Risky Portfolios
C FA PROBLEMS
1.
a.
Restricting the portfolio to 20 stocks, rather than 40 to 50 stocks, will increase the
risk of the portfolio, but it is possible that the increase in risk will be minimal.
Suppose that, for instanc
Chapter 08 - Index Models
C HAPTER 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 Marko
Chapter 07 - Optimal Risky Portfolios
C HAPTER 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. Portfo
Chapter 09 - The Capital Asset Pricing Model
C HAPTER 9: THE CAPITAL ASSET PRICING MODEL
PROBLEM SETS
1.
E(r P ) = r f +
18 = 6 +
2.
P
P (14
[E(r M ) r f ]
6)
P
= 12/8 = 1.5
If the securitys correlation coefficient with the market portfolio doubles (with
Chapter 11 - The Efficient Market Hypothesis
C HAPTER 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 pr
Chapter 10 - Arbitrage Pricing Theory and Multifactor Models of Risk and Return
C HAPTER 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 o
Chapter 12 - Behavioral Finance and Technical Analysis
C HAPTER 12: BEHAVIORAL FINANCE
AND TECHNICAL ANALYSIS
PROBLEM SETS
1.
Technical analysis can generally be viewed as a search for trends or patterns in market
prices. Technical analysts tend to view t
Chapter 28 - Investment Policy and the Framework of the CFA Institute
CHAPTER 28: INVESTMENT POLICY AND
THE FRAMEWORK OF THE CFA INSTITUTE
PROBLEM SETS
1.
You would advise them to exploit all available retirement tax shelters, such as 403b, 401k,
Keogh pl