Assignment 2 Assignment 2, which is worth 15 percent of your total grade for the course, is made up of 15 questions worth a total of 89 marks

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Assignment 2 Assignment 2, which is worth 15 percent of your total grade for the course, is made up of 15 questions worth a total of 89 marks. Review the “Course Assignments” page in the Welcome and Orientation section of this course website for important information regarding requirements for submitting your answers to problem-solving questions. Include your student ID number and contact information on the top page of your assignment. If you have any questions about Assignment 2, contact the Student Support Centre.

 

1.       Among stocks A, B, C, X, Y, Z, and a portfolio consisting of all six stocks, which one do you expect to have a beta closest to one? Explain why. (3 marks)

 

2.       Stocks J, K, and L all have the same expected rate of return and standard deviation. The correlation coefficients between each pair of these stocks are as follows:

 

 

 

Stocks J K L    
J  0.8  0.2    
K  -0.5    
L  

 

 

 

Given these correlation coefficients, which pairs of stocks should be combined together to form a minimum variance portfolio? Explain your choice.

 

 

 

3. The universe of available securities includes only two risky stock funds, X and Y, as well as T-bills. The data for the investment universe are shown in the table below. The correlation coefficient between the two funds is -0.3.

 

 

 

Expected return Standard deviation  
X  0.15  0.25  
Y  0.35  0.55  
T-bills  0.06  0  

 

 

 

 

a. Find the optimal risky portfolio and its expected return and standard deviation.

b. Find the slope of the Capital Allocation Line supported by T-bills and the optimal risky portfolio.

c. If an investor’s utility can be represented by , how much will the investor invest in funds X and Y and in T-bills?

 

 

4.       Use the information in the following tables and the method as shown in section 7.5, “A Spreadsheet Model” (textbook, pp. 224–229), to find portfolio variance, portfolio standard deviation, and the weights for stocks in the portfolio. Attach a copy of the spreadsheet(s) you use to compute your answers. (See Hints.)

 

 

 

 

 

5. Use the information in the following table to determine the betas of the two stocks.

 

Market condition Market return Aggressive stock Defensive stock  
Bear  0.06  0.01  0.07  
Bull  0.18  0.37  0.14  

 

 

 

Assume that portfolios A and B are well diversified, and that their expected rates of return are at 0.13 and 0.09 respectively. If the economy has only one factor, and the betas for the two portfolios are 1.2 and 0.8, what must the risk free rate be? (5 marks)

 

7. If financial markets are all efficient, do investors need portfolio managers? Why or why not? (5 marks)

 

8. Derive the relationships among coupon rate, current yield, and yield to maturity for bonds selling at discount from par, at par, and at premium over par. (Hint: You may assume that the bonds have one year to maturity.) (6 marks)

 

9. A bond pays a coupon rate of 8% per year semiannually when the prevailing market interest rate is at 6%. The bond is four years away from its maturity. Find the bond’s price now, and six months from now after the next coupon is paid. What will the holding period rate of return for the next six months be? (5 marks)

 

10. Define short rate, spot rate, forward rate, and yield to maturity. If the expectations hypothesis holds, how should these rates be related? (6 marks)

 

11. Suppose the prices of zero-coupon bonds are as given in the table below, and each bond has a face value of $1,000.

 

Bond Price Maturity (years)  
A  $955.94  1  
B  $870.22  2  
C  $790.50  3  
D  $715.28  4  
E  $644.14  5  

 

 

 

 

 

a. Calculate the yields to maturity for the five bonds.

 

b. Compute the forward rate for each year.

 

c. How would you construct a one-year forward loan beginning in year 2?

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Please identify and cite one state statute that regulates pornography on the internet and summarize (in not less than 100 words) what that statute accomplishes (please also post the hyperlink to the statute).

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1. Please identify and cite one federal statute that regulates pornography on the internet, and also summarize (in not less than 100 words) what that statute accomplishes (please also post the hyperlink to the statute).

2. Please identify and cite one state statute that regulates pornography on the internet and summarize (in not less than 100 words) what that statute accomplishes (please also post the hyperlink to the statute).

3. Please identify and cite one federal court case that influences online gambling, and also briefly summarize (in not less than 100 words) what that court case accomplishes (please also post the hyperlink to the case summary).

4. Please identify and cite one state court case that influences online gambling, and also briefly summarize (in not less than 100 words) what that court case accomplishes (please also post the hyperlink to the case summary).

Given a risk free rate of 5%, a market return of 15%, and the information for stocks A and B in the following table, determine if stock A and stock B are undervalued or overvalued if they are valued by the security market line.

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Assignment 3

 

Assignment 3, which is worth 15 percent of your total grade for the course, is made up of 14 questions worth a total of 85 marks. Review the “Course Assignments” page in the Welcome and Orientation section of this course website for important information regarding requirements for submitting your answers to problem-solving questions. Include your student ID number and contact information on the top page of your assignment. If you have any questions about Assignment 3, contact the Student Support Centre.

 

1.       Given a risk free rate of 5%, a market return of 15%, and the information for stocks A and B in the following table, determine if stock A and stock B are undervalued or overvalued if they are valued by the security market line.

 

2.

 

Stock Beta Estimated Return  
A  1.3  17%  
B  0.9  15%  

 

 

 

2.

 

A stock has an expected ROE of 14% per year, expected earnings per share of $3, and retention ratio of 40%. Its market capitalization rate is 11% per year. What are its expected growth rate, its price, and its P/E ratio?(6 marks)

 

3.       To estimate the value of a stock, an analyst may use the dividend discount model, multiply the forecast of the stock’s next period earnings per share by the P/E ratio, or estimate the present value of expected future free cash flows. How are the three methods related? Discuss their strengths and weaknesses.(5 marks)

 

4.       The textbook expresses ROE two different ways:

 

 

 

Why is ROE written two different ways? What implicit assumptions are required for these two formats to make sense?(6 marks)

 

5.       Collect data on the S&P/TSX Composite index for two months on a daily basis. Calculate the five-day moving average for each day, then discuss the trend of the index.(7 marks)

 

6.       Is an at-the-money call option on a stock more expensive than an at-

 

the-money put option on the same stock with the same maturity and same strike price? Prove your answer.

 

7.

 

A three-month European call on a non-dividend-paying stock is currently selling for $1. The strike price of the option is $85. The underlying stock trades for $85. The risk-free interest rate is 6%. Does an arbitrage opportunity exist? If you answered “yes,” expla

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Assignment 4 Assignment 4, which is worth 15 percent of your total grade for the course, is made up of EITHER a term paper OR an investment project

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Assignment 4 Assignment 4, which is worth 15 percent of your total grade for the course, is made up of EITHER a term paper OR an investment project. You must decide early in the course (approximately Week 5, or after completion of Unit 1) which option you plan to pursue, and you may NOT switch to the other option after submission of Assignment 1. You must achieve a grade of at least 50 percent on Assignment 4. If you do not achieve this grade, you must revise and resubmit it within two weeks. Failure to do so will result in a failure in the course, regardless of the grades you receive for the other assignments and the final examination. [NOTE that you cannot resubmit from this page—if instructed to resubmit, you must go to the assignment titled “Assignment 4 Resubmission”].

 

 

 

Assignment 4 Option 1: Term Paper The topic of the term paper must fall in the field of investment. The paper should have a theme, discuss the chosen topic thoroughly, express your original view clearly, and make contributions to the field of investments. Review the requirements carefully. Assignment 4 Option 2: Investment Project Imagine you have inherited a large amount of money. You are expected to carry out an investment project detailing your strategy for investing this money and at the end of the project write an investment report. Review the requirements carefully.

 

 

 

 

 

Assignment 4, Option 1: Term Paper—Requirements

 

 The topic of the term paper must fall in the field of investment.

 

 Make sure your term paper has a theme, discusses your chosen topic thoroughly, expresses your original view clearly, and makes contributions to the field of investments.

 

 The paper can be theoretical, empirical, or a survey on investment practice or on an investment instrument.

 

 Your paper should not exceed 20 pages in length (excluding references and appendices.)

 

 The writing style must follow the Journal of Finance. (Check the AU Library to find an electronic copy of the Journal.)1

 

 Your paper must be free of grammar or spelling errors. Each grammar or spelling error may cost you one percent of the total grade assigned for the project, and deductions of marks due to grammar or spelling errors will be accumulated. Check the Athabasca University Write Site if you need help.

 

 

 

 

 

 Your paper must be written individually—no collaboration is allowed.

 

 Plagiarism in any shape or form will be dealt with according to pertinent Athabasca University policies.

 

 

 

Include your student ID number and contact information on the top page of your assignment. If you have any questions about Assignment 4, contact the Student Support Centre. Assignment 4, Option 2: Investment Project—Requirements Imagine that you have inherited a large sum of money. After paying off debts and making some lifestyle purchases (house, car, vacation, RRSPs, and the like), you decide to invest $500,000 in the stock market. Between the start of your course and the fifth week of your studies, you must decide what stocks you would purchase. Consider the short- and long-term goals for your portfolio and which of the following styles you would use to manage it:

 

 Diversified international equity fund

 

 Diversified North American equity fund

 

 Diversified Canadian growth fund

 

 Ethical investment fund (international, North American, or Canadian).

 

 

 

To get an idea of the investments that typically comprise each of these types of funds, you might want to check some of the established mutual funds Web sites, which often have general listings. Do not copy them—this is your portfolio, so customize it to your needs. Sometime between weeks 5 and 14, you should begin the investment project by “buying” shares of companies to constitute your portfolio. Although the period that makes up the investment exercise itself is short (roughly 10 weeks), you should view your investment horizon as long term. If you wish to complete this course in less than 26 weeks, you may begin the portfolio investment project earlier than week 5. However, it is important to note that this project is closely linked to the course lessons. Your success in this project depends on your understanding of the material in the textbook chapters. Your ability to understand material may be compromised if you rush through the lessons; likewise, your ability to successfully complete the project may be compromised if you fail to pace it to the course lessons. You should use Excel spreadsheets to record, track, and manage your portfolio. You will find Web sites such as finance.yahoo.com and www.globeinvestor.com excellent resources for this exercise. You may trade ONLY on North American exchanges and you may NOT trade in mutual funds, bonds, or futures. During the project period, you must do at least one short sale and trade two options. If you elect to trade in the US market, there may be foreign exchange issues to consider. All purchases or sales should be justified based on your investment objectives and investment policy. As well, trades should take into account the economic analysis you undertook in Assignment 1, Part B. The objective of this project is not necessarily to maximize return, but to demonstrate your

 

understanding of management techniques appropriate for the type of portfolio constructed. Accordingly, the project report must

 

 state an investment objective that can be measured numerically.

 

 discuss how your investment portfolio is formed. For example, you may use the spreadsheet model in section 6.10 of chapter 6 to generate the efficient frontier.

 

 include all necessary statistics and computing processing, such as expected returns, standard deviations, covariance, beta, and measures for portfolio performance. These statistics and calculations may be included in an appendix to your report.

 

 record all transaction details of your investments.

 

 be free of grammar or spelling errors. Each grammar or spelling error may cost you one percent of the total grade assigned for the project, and deductions of marks due to grammar or spelling errors will be accumulated. Check the Athabasca University Write Site if you need help.

 

 Include your student ID number and contact information on the top page of your assignment. If you have any questions about Assignment 4, contact the Student Support Centre.

 

 

 

1To access the Journal of Finance, go the Library webpage. Click Databases on the left-hand side of the screen. Click AU Journal Title List. Type in “Journal of Finance.” Select the Journal of Finance (New York)–JSTOR Arts and Sciences I Collection. Choose 2000-2009. Here you will find links to examples of Journal of Finance style.

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