Defensive Companies

Ch.9 – Using the security market line, answer the following questions:

• If the risk free rate is 6% and the return on the market portfolio is 11.4%, what return would an investor expect on a security with a beta of 1.35?
• If the potential investor observes that the stock is yielding 14.5% in the current market, is this stock overpriced or underpriced? Explain.
• Given your answer in (b), what should happen to the price of the stock and why?

Ch.9 – If a security value is a function of the information give in problem 1 and all the participants in the market have access to the same information, why is it that stock prices fluctuate so many times each day?Ch.9 – What are the 5 simple ideas conveyed by the CAPM?Ch. 10 – Explain the principle of arbitrage? If markets are truly efficient, should arbitrage be possible? Why?Ch.11 – Explain the 3 forms of market efficiency with respect to the concept of information transfer.Ch.11 – What is the difference between technical analysis and fundamental analysis? What if the merit of each if markets are truly efficient?Ch.11 – From the articles you have read and written on, do you feel that markets are truly efficient and in which form?Ch.12 – Explain the concept of behavioral finance. How does relate to market efficiency?Ch.14 – Bonds are issued by the Treasury, corporations, and municipalities. What are some common characteristics of these bonds and what are their differences? (risk, taxes, purpose for issue, how they are repaid)Ch.14 – You have a bond that was issued 13 years ago with a coupon rate of 4.5% that is selling today in the open market for 85.34 per $100 of value. What can you say about the present YTM of this bond? What does this indicate has happened to market interest rates since they were issued? If this bond is callable next year, what could potentially happen if you are a holder of this bond?Ch.14 – Explain how credit risk would effect a bond’s rating and ultimately the bond’s market price. How would the following affect the credit risk of a bond and why:

• The bond has a sinking fund
• The bond is subordinated to other debt
• The bond is secured by collateral

Ch.17 – Explain the challenges of investment in foreign companies. Be sure to mention their economy, political climate and exchange rate.Ch.17 – Your text lists 6 macro variables that might effect your investments performance. Choose one and explain in detail how it could impact the outcome of you investment.Ch.17 – The Federal Reserve is the major influencing body of monetary policy. Suppose the Fed wishing to encourage economic growth by increasing the money supply. How could this positively or negatively influence your investment in a company? Is this effect different for cyclical vs. defensive companies?