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1. BUS 405 Entire Course *Principles of Investments*
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Week One
Week 1 – DQ1 - Blume–s Formula, Allocation, and Selection
From Chapter 1, answer Concept Question 5: What is Blume–s 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. You–re 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

2. 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

3. 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

4. 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, Jensen’s 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: They’re 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.