Finance Investment Analysis

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Q 119/120

  1. Define market and briefly discuss the characteristics of a good market.
  • You own 100 shares of General Electric stock and you want to sell it because you need the money to make a down payment on a car. Assume there is absolutely no secondary market system in common stocks. How would you go about selling the stocks? Discuss what you would have to do to find a buyer, how long it might take, and the price you might receive.
  • Define liquidity and discuss the factors that contribute to it. Give examples of a liquid asset and an illiquid asset, and discuss why they are considered liquid and illiquid.
  • Define a primary and secondary market for securities and discuss how they differ. Discuss how the primary market is dependent on the secondary market.
  • Give an example of an initial public offering (IPO) in the primary market. Give an example of a seasoned equity issue in the primary market. Discuss which would involve greater risk to the buyer.
  • Find a story about a recent primary offering in The Wall Street Journal. Based on the information in the story, indicate the characteristics of the security sold and the major underwriters. How much new capital did the firm derived from the offering?
  • Briefly explain the difference between a competitive-bid underwriting and a negotiated underwriting.

10. Briefly define each of the following terms and give an example.

a. Market order

b. Limit order

c. Short sale

d. Stop loss order

11. Briefly discuss the two major functions for the NYSE specialist.


2. Lauren has a margin account and deposits $50,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling at $35 per share.

a. How many shares can Lauren purchase using the maximum allowable margin?

b. What is Lauren’s profit (loss) if the price of Gentry’s stock

                                i. rises to $45?

                                ii. falls to $25?

3. Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at $20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sale. A year later you receive a $0.50 per share dividend and sell the stock for $27 a share. What is your rate of return on Francesca Industries?

5. You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is now selling for $45 a share.

a. You put in a stop loss order at $40. Discuss your reasoning for this action.

b. If the stock eventually declines in price to $30 a share, what would be your rate of return with and without the stop loss order?


2. What major factors must be considered when constructing a market index? Put another way, what characteristics differentiate indexes?

3. Explain how a market index is price weighted. In such a case, would you expect a $100 stock to be more important than a $25 stock? Give an example.

4. Explain how to compute a value-weighted index.

11. Why is it contended that bond-market indexes are more difficult to construct and maintain than stock-market indexes?

12. Suppose that Dow Jones Total Stock Market market-value-weighted index increased by 5 percent, whereas the Merrill Lynch-Dow Jones Capital Markets Index increased by 15 percent during the same period. What does this difference in results imply?

13. Suppose the Russell 1000 increased by 8 percent during the past year, whereas the Russell 2000 increased by 15 percent. Discuss the implication of these results.