Chapter 5 - Portfolio risk and return 1. 10.625% 2. parts 1-4 (see below), parts 5-6.

Note that as A goes up, B goes down correlation is negative. Therefore, there appear to be some diversification benefits. Risk goes down quite a bit with little change to average return. Year Return on A 2009 13% 2010 13 2011 15 2012 16 2013 16 2014 20 Avg 15.50 Std Dev 2.59 Return on B 20% 19 15 13 12 11 15.00 3.74 Portfolio 16.85 16.3 15.00 14.35 13.80 15.05 15.23 1.16

3. Parts 1-4 see below, parts 5-6 The correlation between PQ is -1, while the correlation between PR =+1. Therefore, th risk is the average risk of the individual securities (this only works when correlation = +1). There is perfect diversific Year Asset P Asset Q Asset R 2009 10% 14% 9% 2010 12 12 12 2011 14 10 15 Avg 12 12 12 Std DEv 2 2 3 PQ 12 12 12 12 0 PR 9.5 12 14.5 12 2.5

4. Doesnt enhance return and risk is not zero Year Asset P Asset Q Asset R 2009 10% 14% 9% 2010 12 12 12 2011 14 10 15 Avg Std DEv PQR 11 12 13 12 1

5. average returns are always between 8 and 12% regardless of correlation. The more invested in A the more the return 1. when correlation = +1, there are no diversification benefits. The risk will be between the risk of the individua 2. if correlation = 0, the risk may fall below the 6% (the less risky security) but the risk will never be zero. Also security). 3. if correlation = -1, there is one portfolio with A and B that actually eliminates risk completely (std dev = 0). S 6. Jimmies should offer a higher return since it is riskier (its beta = 1.3). Since Sprinkles offers higher return for lower r

7. If you were completely clairvoyant and you could perfectly predict when a rally was coming, you might pick the stoc the sensitivity of a stocks return to changes in the market. If the beta of Jimmies is 1.3, then it is expected to move m 8. 0.3333 9. 1.04 10. r(P)=9.6%, r(Q)=11.55%, r(R)=8.8%, r(S)=16%, r(T)=11.5% 11. He should invest. CAPM say return should be 3 +1.2*(10-3)=11.4. If he expects 12% return, it more than compensat 12. Efficient portfolios are the ones that offer the highest return for each level of risk. A, D, and F offer the highest return portfolios which can be formed by combining D & F. Combining D & F would dominate all other portfolios given. N higher return for less risk.

13. (i) correlation = +1, (ii) correlation is negative, (iii) correlation is -1, (iv) correlation is positive 14. If correlation =0.7 Stock Bond Return Risk 0% 100% 8.00% 20.00% 25 75 9.75 22.03 50 50 11.50 25.52 75 25 13.25 29.96 100 0 15.00 35.00 If Correlation = -0.3 Stock Bond Return Risk 0% 100% 8.00% 20.00% 25 75 9.75 14.93 50 50 11.50 17.36

75 100

25 0

13.25 15.00

25.21 35.00

15. 2.00 16. stock is expected to earn less than required (9%<10%). It is a bad investment Chapter 6 - Fundamental analysis 1. Asset mgmt: TATO=1.11, cannot calculate DSO or Inv TO Debt mgmt: Debt ratio=55.6%, D/E=1.25, eq. mult=2.25, TIE=5.0 Profitability: PM=10%, ROA=11.1%, ROE=25% Liquidity: Curr. Ratio = 1.0, cannot do Quick ratio since current assets do not present inventory separately A. 30%, b. 60% 107,143 D/E=2.33, eq. mult=3.33 75% A. 5.0, b. 0.5 920,000 80 1. 2. 3. 4. 5. 6. 110.96 105.48 316.44 591.44 8.45% 416.67
o o o o

2. 3. 4. 5. 6. 7. 8. 9.

7. 69.29 +70,000 878,400 2,400,000 Chapter 7 - Stock valuation 1.

1. $4.01 2. 1.50 2. $1.67 3. $7.2 million 4. $22.22 5. 1. $4.8 million 2. $1.09 3. 52.36 4. 98% 6. 1. $76.16 2. 18.72% 7. No the intrinsic value is $30, but it would cost him more to buy the stock in the market 8. 1. $77.72 2. 26.10% 3. $77.14 4. $99.51 9. 1. 29.03% 2. $115.08. Yes it is a good investment. Our analysis shows we think it is worth more than market price and w 10. $156.75, 25% 11. $13.10 12. 1. 36.91 2. 39.20 3. 6.2% cg yield and 3.8% div yield 4. 5% cg and div yield 13. $30.15 14. 13.78% 15. Some assumptions need to be made. If you assume that sales increase at 25%, the profit margin is 10%, and the divi approximately $187.

Chapter 8 - Technical analysis

1. 0.49 2. 0.95 3. 1.33, 3.33, and 0.40. Day 3 was the most bullish since the average volume of trades for advancing stocks was the hig

4. Daily Breadth Adv/Dec Line +231 +231 +50 +281 +5 +286 5. 6. -20,000, -50,000, +50,000. OBV has fallen from 60,000 to 50,000 a slight bearish number. 7. Whenever the stock price falls below the MA this is a sell indicator. As the stock goes above MA, buy. Day 10 11 12 13 14 15 16 17 18 19 20 Price 27.5 29 29 31.5 32 31 33 28 28 26.5 26 Moving Avg Indicator 27.55 27.95 Buy 28.25 28.65 29.00 29.30 29.70 29.70 Sell 29.50 29.55 29.40

7. = 4,000,000/650 = 6153.85 = .48 3,500.000/275 12727.27 8. Day 1) = 2,200,000/479 = 4592.9 2,500,000/300 8333.33 Day 2) = 2,500,000/425 = 5882.35 2,700,000/285 9473.68 Day 3) = 2,450,000/450 = 5444.44 2,750,000/375 7333.33 Daily Breadth Adv/Dec Line -179 -179 -140 -319 -75 -394 =.55 =.62 = .74

Some Questions from Baseline (Chapters 5 through 8)

Solutions to problems 2