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Tutorial 1

This tutorial provides an introduction to investments and asset allocation. It discusses key concepts such as the purpose of investing, components of return, factors that influence risk, and liquidity. It then provides examples of calculations for stock and mutual fund returns including holding period return and yield. Asset allocation strategies and investment policy statements are also covered.

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One Ashley
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69 views

Tutorial 1

This tutorial provides an introduction to investments and asset allocation. It discusses key concepts such as the purpose of investing, components of return, factors that influence risk, and liquidity. It then provides examples of calculations for stock and mutual fund returns including holding period return and yield. Asset allocation strategies and investment policy statements are also covered.

Uploaded by

One Ashley
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial: Introduction to Investments and Asset Allocation

1. Discuss the overall purpose people have for investing. Define investment.

2. Discuss the three components of an investor’s required rate of return on an investment.

3. Briefly discuss the five fundamental factors that influence the risk premium of an investment.

4. If the Nominal Risk free rate is 9.18%, What is the expected rate of inflation if the real growth of the
economy is given at 3%?

5. Give an example of a liquid investment and an illiquid investment. Discuss why you consider each of them
to be liquid or illiquid.

6. On March 1, you bought 200 shares of stock in the Pula Limited for P24 a share and a year later you sold it
for P29 a share. During the year, you received a cash dividend of P1.15 a share. Compute your HPR and HPY
on this Pula stock investment.

7. On August 15, you purchased 300 shares of stock in the Choppies at P37 a share and a year later you sold it
for P45 a share. During the year, you received dividends of P2 a share. Compute your HPR and HPY on your
investment in Choppies.

8. At the beginning of last year, you invested P5,000 in 80 shares of the Lucara Corporation. During the year,
Lucara paid dividends of P6 per share. At the end of the year, you sold the 80 shares for P66 a share.
Compute your total HPY on these shares and indicate how much was due to the price change and how much
was due to the dividend income.

9. During the past five years, you owned two stocks that had the following annual rates of return:

Year Stock T Stock B


1 0.19 0.08
2 0.08 0.03
3 −0.12 −0.09
4 −0.03 0.02
5 0.15 0.04

a) Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this
measure?
b) Compute the standard deviation of the annual rate of return for each stock. By this measure, which is the
preferable stock?
c) Compute the coefficient of variation for each stock. By this relative measure of risk, which stock is
preferable?
d) Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic
mean return and the geometric mean return for each stock.
10. You are considering acquiring shares of common stock in the Madison Beer Corporation. Your rate of
return expectations are as follows:

MADISON BEER CORP.


Possible Rate of Return Probability
−0.10 0.30
0.00 0.10
0.10 0.30
0.25 0.30
Compute the expected return [E(Ri)] on your investment in Madison Beer.

11. “Young people with little wealth should not invest money in risky assets such as the stock market,
because they can’t afford to lose what little money they have.” Do you agree or disagree with this statement?
Why?
12. Discuss how an individual’s investment strategy may change as he or she goes through the accumulation,
consolidation, spending, and gifting phases of life.

13. Why is a policy statement important?

14. What information is necessary before a financial planner can assist a person in constructing an investment
policy statement?

15. You are given the following long-run annual rates of return for alternative investment instruments:

U.S. Government T-bills 3.50%


Large-cap common stock 11.75
Long-term corporate bonds 5.50
Long-term government bonds 4.90
Small-capitalization common stock 13.10
The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these
investment alternatives.

16. Mr. Jerome is an energy trader who works for a major French oil company based in Paris. He is 30 years
old and married with one son, aged 5. He plans to retire at 50. His annual salary is €250,000 and is more than
sufficient to cover the family’s outgoings. He owns his apartment outright and has €1,000,000 of savings
which will be used to fund his retirement. He perceives his job to be reasonably secure, has a good knowledge
of financial matters and is willing to take risk. Gascon expects that he will continue to work for the oil
company and that his relatively high income will continue for the foreseeable future. Gascon and his wife do
not plan to have any additional children, but expect that their son will go to a university at age 18. They
expect that their son’s education costs can be met out of their salary income. Gascon’s emergency reserve of
€100,000 is considered to be sufficient as a reserve for unforeseen expenditures and emergencies. His
retirement savings of €1,000,000 has been contributed to his defined-contribution pension plan account to
fund his retirement. Under French regulation, pension fund contributions are paid from gross income (i.e.,
income prior to deduction of tax) and pension fund returns are exempt from tax, but pension payments from a
fund to retirees are taxed as income to the retire
a) Formulate and justify an investment policy statement. Your policy statement should encompass all relevant
objective and constraint considerations.

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