Chapter 05 - Learning About Return and Risk from the Historical Record
CHAPTER 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 ex

Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS 1. 2. (e) (b) A higher borrowing is a consequence of the risk of the borrowers default. In perfect markets with

Chapter 07 - Optimal Risky Portfolios
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. Portfol

Chapter 09 - The Capital Asset Pricing Model
CHAPTER 9: THE CAPITAL ASSET PRICING MODEL
PROBLEM SETS 1. E(rP) = rf + P [E(rM ) rf ] 18 = 6 + P(14 6) P = 12/8 = 1.5 2. If the securitys correlation coefficient with the market portfolio doubles (with all oth

Chapter 10 - Arbitrage Pricing Theory and Multifactor Models of Risk and Return
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 ol

Chapter 11 - The Efficient Market Hypothesis
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 pre

Chapter 14 - Bond Prices and Yields
CHAPTER 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. Zero c

Chapter 18 - Equity Valuation Models
CHAPTER 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 be

Chapter 20 - Options Markets: Introduction
CHAPTER 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 invest

Chapter 24 - Portfolio Performance Evaluation
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

Chapter 01 - The Investment Environment
CHAPTER 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 creates

Chapter 02 - Asset Classes and Financial Instruments
CHAPTER 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. Prefer

Chapter 03 - How Securities are Traded
CHAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS 1. 2. Answers to this problem will vary. The SuperDot system expedites the flow of orders from exchange members to the specialists. It allows members to send computer

Chapter 04 - Mutual Funds and Other Investment Companies
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

Chapter 05 - Learning About Return and Risk from the Historical Record
CHAPTER 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 ex

Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS 1. 2. (e) (b) A higher borrowing is a consequence of the risk of the borrowers' default. In perfect markets with

Chapter 07 - Optimal Risky Portfolios
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. Portfol

Chapter 08 - Index Models
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 Markow

Chapter 09 - The Capital Asset Pricing Model
CHAPTER 9: THE CAPITAL ASSET PRICING MODEL
PROBLEM SETS 1. E(rP) = rf + P [E(rM ) rf ] 18 = 6 + P(14 6) P = 12/8 = 1.5 2. If the security's correlation coefficient with the market portfolio doubles (with all ot

Chapter 10 - Arbitrage Pricing Theory and Multifactor Models of Risk and Return
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 ol

Chapter 11 - The Efficient Market Hypothesis
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 pre

Chapter 12 - Behavioral Finance and Technical Analysis
CHAPTER 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 th

Chapter 13 - Empirical Evidence on Security Returns
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 qui

Chapter 14 - Bond Prices and Yields
CHAPTER 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. Zero c

Chapter 15 - The Term Structure of Interest Rates
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS. 1. In general, the forward rate can be viewed as the sum of the market's expectation of the future short rate plus a potential risk (or `liqui

Chapter 16 - Managing Bond Portfolios
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 re

Chapter 18 - Equity Valuation Models
CHAPTER 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 be

Chapter 24 - Portfolio Performance Evaluation
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

CHAPTER 1 INVESTMENT ENVIRONMENT
1-1
Outline of the Chapter
Real assets vs Financial Assets Classification of Financial Assets Financial Markets and the Economy The Investment Process The Competitiveness of the Financial Markets The Players in the Financ

CHAPTER 3
HOW SECURITIES ARE TRADED
3-1
Outline of the Chapter
The methods to issue securities The methods to trade the securities Securities Markets in USA, Europe and Turkey Concepts like
Trading cost Buying on margin Short Sales
3-2
How Firms Issue S