BUS 405

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BUS 405 CHAPTERS 1-4

US 405 Week 1 Chapter 1 A Brief History of Risk and Return

BUS 405 Week 1 Chapter 2 The Investment Process
BUS 405 Week 1 Chapter 3 Overview of Security Types
BUS 405 Week 1 Chapter 4 Mutual Funds
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BUS 405 ENTIRE COURSE *PRINCIPLES OF INVESTMENTS*

Week One

Week 1 DQ1 - Blumes Formula, Allocation, and Selection

From Chapter 1, answer Concept Question 5: What is Blumes formula? When would you want to use it in practice?
Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security
selection? Remember to complete all parts of the questions and support your answers with examples from the text
and other resources.

Week 1 DQ2 - Money Market Funds

From Chapter 4, complete Problem 4: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share.

During the year, the assets held by this fund appreciated by 2.5 percent. If you had invested $50,000 in this fund at
the start of the year, how many shares would you own at the end of the year? What will the NAV of this fund be at the
end of the year? Why? Remember to complete all parts of the question, show your work, and report the results of your
analysis.

Assignment
Week 1- Assignment - Annualized Returns Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below)
and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a
100 word analysis of the process to calculate these annualized returns.

Suppose you have $28,000 to invest. Youre considering Miller-Moore Equine Enterprises (MMEE), which is
currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to
maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these
two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share?
Week Two

Readings

Chapter 5: The Stock Market

Chapter 6: Common Stock Valuation
Chapter 7: Stock Price Behavior and Market Efficiency
Chapter 8: Behavioral Finance and the Psychology of Investing

Discussions

Week 2 DQ1 - Primary and Secondary Markets

Complete Concept Question 1 from Chapter 5: If you were to visit your local Chevrolet retailer, there is both a primary
and a secondary market in action. Explain. Is the Chevy retailer a dealer or a broker? Remember to complete all parts
of the question and support your answers with examples from the text and other resources.

Week 2 DQ2 - Contrarian Investing

Complete Concept Question 9 from Chapter 8: What does it mean to be a contrarian investor? How would a
contrarian investor use technical analysis? Post your answers to the discussion board. Remember to complete all
parts of the question and support your answers with examples from the text and other resources.

Assignment

Week 2 Assignment - Abbott Laboratories Problem

After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of
Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show
your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value
of Abbott Laboratories stock at its current price of $50 per share.

27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the
2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock
price each year to calculate the price ratios.
29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean
surplus relationship to calculate the share price for Abbott Laboratories with the residual income model.
30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do
you get the same stock price as in the previous problem? Why or why not?
31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its
current price of around $50? At what price do you feel the stock should sell?
Week Three

Discussions

Week 3 DQ1 - Forward Interest Rates

Complete Problem 16 from the Questions and Problems section of Chapter 9: According to the pure expectations
theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2011? What is the
corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS?
What does this tell you about the relationship between implied forward rates, the shape of the zero coupon yield
curve, and market expectations about future spot interest rates? Remember to complete all parts of the questions, and
report the results of your analysis.

Week 3 DQ2 - Bond Prices versus Yields

Complete Concept Question 9 of Chapter 10: (a) What is the relationship between the price of a bond and its YTM?
(b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know
about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For
bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For
discount bonds? For bonds selling at par value? Remember to complete all parts of the questions, and report the
results of your analysis.

Assignment

Week 3 Assignment Bootstrapping Chapter 10 Problem 31

Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the
algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word
essay on the term structure of fixed income securities.

One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you
have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To
bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+
(C_2+Par value)/(1+r_2 )^2

Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate.
Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5
percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three
years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years?
Week Four
Discussions

Week 4 DQ1 Expected Returns and Deviation

Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to
complete all parts of the questions, and report the results of your analysis.
a. Use the following information on states of the economy and stock returns to calculate the expected return for
Dingaling Telephone.
State of Economy
Probability of State of the Economy
Security Return if State Occurs
Recession
.30

-8%
Normal
.40
13
Boom
.30
23
b. Using the information in the previous question, calculate the standard deviation of returns.
c. Repeat Questions 1 & 2 assuming that all three states are equally likely.
Week 4 DQ2 Portfolio Weights
Complete Problem 10 from the Questions and Problems section of Chapter 12: A stock has a beta of .9 and an
expected return of 9 percent. A risk-free asset currently earns 4 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?
d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights
for the two assets in this case? Explain.
Assignment

Week 4 Assignment Performance Metrics Chapter 13 Problem 22Complete Problem 22 in the

Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio,
defend your decision in a 100 - 200 word essay.
You have been given the following return information for two mutual funds (Papa and Mama), the market index, and
the risk-free rate.
Year
Papa Fund
Mama Fund
Market

Risk-Free
2008
-12.6%
-22.6
-24.5%
1%
2009
25.4
18.5
19.5
3
2010
8.5
9.2
9.4
2
2011
15.5
8.5
7.6
4

2012
2.6
-1.2
-2.2
2

Calculate the Sharpe ratio, Treynor ratio, Jensens alpha, information ratio, and R-squared for both funds and
determine which is the best choice for your portfolio.
Week Five

Discussions

Week 5 DQ1 Hedging with Futures

Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and
Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue.
Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to
complete all parts of the question and support your answers with examples from the text and other resources.
Week 5 DQ2 Option Strategies

Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call
discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how
you would implement them. (Hint: Theyre called protective calls and covered puts.) Remember to complete all parts
of the question and support your answers with examples from the text and other resources.

Final Project

Week 5 Final Project Construct a well-diversified portfolio

The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio
should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or
preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will

use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues
may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or
$10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no
fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The
student does not have to use all of the above mentioned securities, but they must use more than one class.
Transaction costs are ignored in the creation of the portfolio.
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BUS 405 WEEK 1 ASSIGNMENT ANNUALIZED RETURNS CHAPTER 3 PROBLEM 18

Assignment
Week 1- Assignment - Annualized Returns Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below)
and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a
100 word analysis of the process to calculate these annualized returns.

Suppose you have $28,000 to invest. Youre considering Miller-Moore Equine Enterprises (MMEE), which is
currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to
maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these
two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share?
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BUS 405 WEEK 2 ASSIGNMENT ABBOTT LABORATORIES PROBLEM

Week 2 Assignment - Abbott Laboratories Problem

After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of
Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show
your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value
of Abbott Laboratories stock at its current price of $50 per share.

27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the
2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock

price each year to calculate the price ratios.

29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean
surplus relationship to calculate the share price for Abbott Laboratories with the residual income model.
30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do
you get the same stock price as in the previous problem? Why or why not?
31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its
current price of around $50? At what price do you feel the stock should sell?
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BUS 405 WEEK 2 CHAPTERS 5-8

BUS 405 Week 2 Chapter 5 The Stock Market
BUS 405 Week 2 Chapter 6 Common Stock Valuation
BUS 405 Week 2 Chapter 7 Stock Price Behavior and Market Efficiency
BUS 405 Week 2 Chapter 8 Behavioral Finance and the Psychology of Investing
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BUS 405 WEEK 3 ASSIGNMENT BOOTSTRAPPING CHAPTER 10 PROBLEM 31

Week 3 Assignment Bootstrapping Chapter 10 Problem 31

Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the
algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word
essay on the term structure of fixed income securities.

One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you
have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To
bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+
(C_2+Par value)/(1+r_2 )^2

Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate.
Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5
percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three
years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years?
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BUS 405 WEEK 3 CHAPTERS 9-10

BUS 405 Week 3 Chapter 9 Interest Rates

BUS 405 Week 3 Chapter 10 Bond Prices and Yields
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BUS 405 WEEK 4 ASSIGNMENT PERFORMANCE METRICS CHAPTER 13 PROBLEM 22

Week 4 Assignment Performance Metrics Chapter 13 Problem 22Complete Problem 22 in the
Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio,
defend your decision in a 100 - 200 word essay.
You have been given the following return information for two mutual funds (Papa and Mama), the market index, and
the risk-free rate.
Year
Papa Fund
Mama Fund
Market
Risk-Free
2008

-12.6%
-22.6
-24.5%
1%
2009
25.4
18.5
19.5
3
2010
8.5
9.2
9.4
2
2011
15.5
8.5
7.6
4
2012
2.6

-1.2
-2.2
2

Calculate the Sharpe ratio, Treynor ratio, Jensens alpha, information ratio, and R-squared for both funds and
determine which is the best choice for your portfolio.
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BUS 405 WEEK 4 CHAPTERS 11-13

BUS 405 Week 4 Chapter 11 Diversification and Risky Asset Allocation

BUS 405 Week 4 Chapter 12 Return, Risk, and the Security Market Line
BUS 405 Week 4 Chapter 13 Performance Evaluation and Risk Management
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BUS 405 WEEK 5 PROJECT CONSTRUCT A WELL-DIVERSIFIED PORTFOLIO

Final Project

Week 5 Final Project Construct a well-diversified portfolio

The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio
should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or
preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will
use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues

may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or
$10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no
fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The
student does not have to use all of the above mentioned securities, but they must use more than one class.
Transaction costs are ignored in the creation of the portfolio.
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