This document provides an overview of course materials for BUS 405 Principles of Investments. It includes summaries of chapters to be covered each week, discussion questions to be completed, and assignments. Week 1 covers chapters on the history of risk and return, the investment process, security types, and mutual funds. The assignment involves calculating annualized returns. Week 2 covers chapters on stock markets, valuation, behavior, and efficiency. The assignment involves valuing Abbott Laboratories stock. Week 3 covers interest rates, bond prices/yields, and the assignment involves bootstrapping yields. Week 4 covers performance metrics and the assignment involves evaluating mutual funds based on metrics.
1. 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 MutualFunds
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BUS 405 ENTIRE COURSE *PRINCIPLES OF
INVESTMENTS*
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 touse it in practice?
Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security
selection? Remember tocomplete allparts 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 Fundhas a NAV of $1 per share.
During theyear,the assets heldby this fundappreciated by 2.5percent. If y ou had invested$50,000 in this fund at
the start of the year,how many shares wouldyou own at the end of the year? What will the NAV of this fund be at the
end of the y ear? Why?Remember tocomplete all parts of the question,show your work,and report the results of y our
2. analysis.
Assignment
Week 1 -Assignment -Annualized Returns – Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below)
and submit totheinstructor.Show your work tofind theannualized return for each of the listed shareprices.Write a
1 00 word analysis of the process tocalculate these annualized returns.
Suppose y ou have $28,000toinvest.You’re considering Miller-Moore Equine Enterprises (MMEE),which is
currently selling for $40 per share.You alsonotice that a call option with a $40 strike price and six months to
maturity is available.The premiumis $4.00.MMEE pays nodividends.What is your annualized return from these
twoinvestments 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: StockPrice Behavior and Market Efficiency
Chapter 8: BehavioralFinanceand the Psychology of Inv esting
Discussions
Week 2 – DQ1 -Primary and Secondary Markets
Complete Concept Question 1 from Chapter 5: If y ou were tov isit 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 tocomplete allparts
of the question and support your answers with examples from the text and other r esources.
Week 2 – DQ2 - Contrarian Investing
Complete Concept Question 9 from Chapter 8: What does it mean tobe a contrarian investor? How would a
contrarian investor usetechnicalanalysis? Post y our answers tothe discussion board.Remember tocomplete 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 toy our instructor.Show
y our calculations and in your response toproblem 31 write a 100 to200 word defense of y our position as tothe value
3. of Abbott Laboratories stock at its current price of $50 per share.
27 .What is the sustainable growth rateand required return for Abbott Laboratories? Using these values,calculate the
2010 shareprice of Abbott Laboratories Industries stock accor ding tothe constant dividend growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010share pricefor Abbott Laboratories.Use the average stock
price each year tocalculatethe price ratios.
29. Assumethe sustainable growth rateand required return you calculated in Problem 27 are valid.Use the clean
surplus relationship tocalculatethe share price for Abbott Laboratories with the residualincome model.
30. Use the information from the previous problem andcalculate the stockprice with the clean surplus dividend.Do
y ou get the same stockprice as in the previous problem? Why or why not?
31 .Given your answers in theprevious questions,doy ou feelAbbott Laboratories is ov ervalued or undervalued at its
current price of around $50? At what pricedoy ou feel thestock should sell?
Week Three
Discussions
Week 3 – DQ1 -ForwardInterest Rates
Complete Problem 16 from theQuestions andProblems section of Chapter 9:According tothe pure expectations
theory of interest rates,how much do y ou expect topay for a one-year STRIPS on February 15,2011? What is the
corresponding implied forward rate? How does y our answer compare tothe current yield on a one-year STRIPS?
What does this tell you about the relationship between implied forward rates,the shape of the zerocoupon yield
curve,and market expectations about future spot interest rates? Remember tocompleteallparts of the questions, and
report the results of y our analysis.
Week 3 – DQ2 - Bond Prices v ersus 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 premiumtopar value, and other bonds sell at a discount. What doy ou 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 yieldandYTM for premiumbonds? For
discount bonds? For bonds selling at par value? Remember tocomplete all parts of the questions,and report the
results of y our analysis.
Assignment
Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31
4. Complete problem 31 of Chapter 10(shown below),and submit toyour instructor. Show your calculations and the
algebraicmanipulation of the price equation for the bond.In addition tosolv ing theproblem,writea 100to200word
essay on theterm structure of fixed income securities.
One method used toobtain an estimate of the termstructure of interest rates is called bootstrapping. Suppose you
have a one-year zerocoupon 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 theprice (P) of the coupon bond: /(1+r_1
)+(C_2+Par value)/(1+r_2 )^2
Because you can observeallof the variables except r2, the spot rate for twoyears,you can solve for this interest rate.
Suppose thereis a zerocoupon bond with one year tomaturity that sells for $949 and a two-year bond with a 7.5
percent coupon paidannually that sells for $1 ,020.What is the interest rate for twoyears? Suppose a bond with three
y ears until maturity and an 8.5 percent annualcoupon sells for $1 ,029.What is the interest rate for threeyears?
Week Four
Discussions
Week 4 – DQ1 – Expected Returns and Deviation
Complete Problems 1,2,and 3 from theQuestions and Problems section of Chapter 11 (shown below).Remember to
complete allparts of the questions, and report theresults of y our analysis.
a. Use the following information on states of the economy and stockreturns tocalculate 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
1 3
Boom
5. .30
23
b. Using the information in the previous question,calculate the standard deviation of returns.
c. Repeat Questions 1 & 2 assuming that allthree states are equally likely.
Week 4 – DQ2 – PortfolioWeights
Complete Problem 10from the Questions and Problems section of Chapter 12: A stock has a beta of .9 andan
expected return of 9 percent. A risk-freeasset currently earns 4 percent.
a. What is the expected return on a portfoliothat is equally invested in the twoassets?
b. If a portfolioof the twoassets has a beta of .5, what are theportfolioweights?
c. If a portfolioof the twoassets has an expected return of 8 percent,what is its beta?
d. If a portfolioof the twoassets has a beta of 1 .80, what are the portfolioweights? How doy ou interpret the weights
for the twoassets 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 pickthe best choicefor your portfolio,
defend y our decision in a 100 -200word essay.
You havebeen given the following return information for twomutualfunds (Papa andMama),the market index,and
the risk-free rate.
Year
Papa Fund
Mama Fund
Market
Risk-Free
2008
-1 2.6%
-22.6
-24.5%
1 %
6. 2009
25.4
1 8.5
1 9.5
3
2010
8.5
9.2
9.4
2
2011
1 5.5
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
7. Discussions
Week 5 – DQ1 – Hedging with Futures
Complete Concept Question 7 from Chapter 14: The town of South Parkis planning a bond issue in six months and
Kenny,the town treasurer, is worriedthat interest rates may rise,thereby reducing the value of the bond issue.
Should Kenny buy or sell Treasury bond futures contracts tohedge theimpending bond issue? Remember to
complete allparts 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 thetext. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how
y ou would implement them.(Hint: They’re called protective calls and covered puts.) Remember tocomplete 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 willconstruct a well-diversified portfoliousing an initial investment stake of $50,000(theportfolio
should use 95% of the fund, but they may not use morethan $50,000). The student may include stocks,common or
preferred; bonds,corporate or U.S. Treasury bonds; mutualfunds; and futures contract or options. The student will
use the closing prices from the first day of the class todetermine the price of each issue.Only whole lots of any issues
may be acquired,that is noless than 100shares of common or preferred stock;noless than 5 corporate bonds or
$1 0,000for U.S. Treasury Bonds; nofewer than theminimum requiredinvestment for any mutual fund; and no
fewer than 5 contracts for any option or futures position.The settlement datewill be the first day of Week 3. The
student does not have touse all of the above mentioned securities, but they must use morethan one class.
Transaction costs areignored in thecreation 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 totheinstructor.Show your work tofind theannualized return for each of the listed shareprices.Write a
8. 1 00 word analysis of the process tocalculate these annualized returns.
Suppose y ou have $28,000toinvest.You’re considering Miller-Moore Equine Enterprises (MMEE),which is
currently selling for $40 per share.You alsonotice that a call option with a $40 strike price and six months to
maturity is available.The premiumis $4.00.MMEE pays nodividends.What is your annualized return from these
twoinvestments if,in six months,MMEE is selling for $48 per share? What about $36 per share?
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1 8
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 toy our instructor.Show
y our calculations and in your response toproblem 31 write a 100 to200 word defense of y our position as tothe value
of Abbott Laboratories stock at its current price of $50 per share.
27 .What is the sustainable growth rateand required return for Abbott Laboratories? Using these values,calculate the
2010 shareprice of Abbott Laboratories Industries stock according tothe constant dividend growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010share pricefor Abbott Laboratories.Use the average stock
price each year tocalculatethe price ratios.
29. Assumethe sustainable growth rateand required return you calculated in Problem 27 are valid.Use the clean
surplus relationship tocalculatethe share price for Abbott Laboratories with the residualincome model.
30. Use the information from the previous problem andcalculate the stockprice with the clean surplus dividend.Do
y ou get the same stockprice as in the previous problem? Why or why not?
31 .Given your answers in theprevious questions,doy ou feelAbbott Laboratories is ov ervalued or undervalued at its
current price of around $50? At what pricedoy ou feel thestock should sell?
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BUS 405 WEEK 2 CHAPTERS 5-8
BUS 405 Week 2 Chapter 5 The StockMarket
9. BUS 405 Week 2 Chapter 6 Common StockValuation
BUS 405 Week 2 Chapter 7 Stock Price Behavior and Market Efficiency
BUS 405 Week 2 Chapter 8 Behavioral Finance and the Psychology of Inv esting
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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 toyour instructor. Show your calculations and the
algebraicmanipulation of the price equation for the bond.In addition tosolv ing theproblem,writea 100to200word
essay on theterm structure of fixed income securities.
One method used toobtain an estimate of the termstructure of interest rates is called bootstrapping. Suppose you
have a one-year zerocoupon 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 theprice (P) of th e coupon bond: /(1+r_1
)+(C_2+Par value)/(1+r_2 )^2
Because you can observeallof the variables except r2, the spot rate for twoyears,you can solve for this interest rate.
Suppose thereis a zerocoupon bond with one year tomaturity that sells for $949 and a two-year bond with a 7.5
percent coupon paidannually that sells for $1 ,020.What is the interest rate for twoyears? Suppose a bond with three
y ears until maturity and an 8.5 percent annualcoupon sells for $1 ,029.What is the interest rate for threeyears?
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BUS 405 WEEK 3 CHAPTERS 9-10
BUS 405 Week 3 Chapter 9 Interest Rates
BUS 405 Week 3 Chapter 10Bond Prices and Yields
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10. 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 pickthe best choicefor your portfolio,
defend y our decision in a 100 -200word essay.
You havebeen given the following return information for twomutualfunds (Papa andMama),the market index,and
the risk-free rate.
Year
Papa Fund
Mama Fund
Market
Risk-Free
2008
-1 2.6%
-22.6
-24.5%
1 %
2009
25.4
1 8.5
1 9.5
3
2010
8.5
9.2
11. 9.4
2
2011
1 5.5
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.
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problem-22
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 theSecurity Market Line
BUS 405 Week 4 Chapter 13Performance Evaluation and Risk Management
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12. BUS 405 WEEK 5 PROJECT CONSTRUCT A WELL-
DIVERSIFIED PORTFOLIO
Final Project
Week 5 – Final Project –Construct a well-diversified portfolio
The student willconstruct a well-diversified portfoliousing an initial investment stake of $50,000(theportfolio
should use 95% of the fund, but they may not use morethan $50,000). The student may include stocks,common or
preferred; bonds,corporate or U.S. Treasury bonds; mutualfunds; and futures contract or options. The student will
use the closing prices from the first day of the class todetermine the price of each issue.Only whole lots of any issues
may be acquired,that is no less than 100shares of common or preferred stock;noless than 5 corporate bonds or
$1 0,000for U.S. Treasury Bonds; nofewer than theminimum requiredinvestment for any mutual fund; and no
fewer than 5 contracts for any option or futures position.The settlement datewill be the first day of Week 3. The
student does not have touse all of the above mentioned securities, but they must use morethan one class.
Transaction costs areignored in thecreation of the portfolio.
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