1. Many people think of risk as the danger of losing money. Is this the same way that risk is defined in finance?
2. Sally is reviewing the performance of several portfolios in the family trusts. Trust A is managed by Wall Street Investment Advisors and Trust B is managed by LaSalle Street Investment Advisors. Both trusts are invested in a combination of stocks and bonds and have the following returns:
a) Calculate the annualized geometric and arithmetic returns over this 5-year period.
b) Which manager performed the best, and is there a significant enough difference for Sally to move her money to the winning manager?
c) Explain the difference between the geometric and arithmetic returns.
3. What is an efficient market?
4. If you did not wish a high-priced or heavily capitalized firm (one with high total market value) to overly influence your index, which of the weighting systems described in this chapter would you be likely to use?
5. You sell 100 shares of Norton Corporation short. The price of the stock is $60 per share. The margin requirement is 50 percent.
a) How much is your initial margin?
b) If stock goes down to $42, what is your percentage gain or loss on the initial margin (equity)?
c) If stock goes up to $67.50, what is your percentage gain or loss on the initial margin (equity)?
d) In part c, if the minimum margin standard is 30 percent, will you be required to put up more margin? (Do the additional necessary calculations to answer this question.)
6. Assume the following five companies are used in computing an index:
a) If the index is price weighted, what will be the value of the index on December 31, 2007? (Take the average price on December 31, 2007, and divide by the average price on January 1, 1984, and multiply by 100.)
b) If the index is value weighted, what will be the value of the index on December 31, 2007? (Take the total market value on December 31, 2007, and divide by the total market value on January 1, 1984, and multiply by 100.)
c) Explain why the answer in part b is different from the answer in part a.
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