BUS 405

Entire Course
_Principles of Investments_

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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
Chapter
Chapter
Chapter

5:
6:
7:
8:

The Stock Market

Common Stock Valuation
Stock Price Behavior and Market Efficiency
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
22 Complete 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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