Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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QUESTION ONE
- Why do most investors hold diversified portfolios? and What is covariance, and why is it important in portfolio theory?
- Why do most assets of the same type show positive covariances of returns with each other? Would you expect positive covariances of returns between differenttypes of assets such as returns on Treasury bills, General Electric common stock, and commercial real estate? Why or why not?
- What is the relationship between covariance and the correlation coefficient? and Explain the shape of the efficient frontier.
- Draw a properly labeled graph of the Markowitz efficient frontier. Describe the efficient frontier in exact terms. Discuss the concept of dominant portfolios, and show an example of one on your graph.
- Assume you want to run a computer program to derive the efficient frontier for your feasible set of stocks. What information must you input to the program?
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- What could you comment on this statement? "Caution is warranted when using PE ratio to value stocks"arrow_forwardWith the aid of relevant examples, contrast value investing with growth investing and show how these are applicable to the portfolio management process. Discuss which type of shares are most suitable to be assessed with the Piotrowski framework? 3. Critically discuss any recent news article of your choice within the context of the Efficient Market Hypothesis. 4. What are the key differences between the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) as they relate to portfolio management?arrow_forwardDescribe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?arrow_forward
- Based on the results from Fama and French, does it matter for the Efficient Markets Hypothesis if value stocks are riskier than growth stocks, or if growth stocks are riskier than value stocks? Why or why not?arrow_forwardDescribe precisely one way that you would test if a particular stock market is strong-form efficient.arrow_forwardDo investors generally prefer dividends or share repurchases? Support your answer.arrow_forward
- Why do technical analysts look at the moving average of a company’s stock price, and why do they look at trend lines? (Did you know that technical analysis is used for bond investing too?)arrow_forwardDiscuss the impact of investor sentiment on stock returns conditional on economic conditions?arrow_forwardDefine beta. How is it calculated? How can it be used by investors?arrow_forward
- What role does sentiment play to explain stock price volatility? Explainarrow_forward1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.arrow_forwardIn portfolio management, risk reduction is achieved by investing in a portfolio in which the securities Question 3 options:1) have a high covariance 2) have a high correlation coefficient 3) have a low coefficient of variation 4) have a lowcovariance 5) are perfectly positively correlated.arrow_forward
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