As they discussed their investments, Walt said that the only way an individual who does not have hundreds of thousands of dollars can invest safely is to buy mutual fund shares.
To be safe, a person needs to hold a broadly diversified portfolio and only those with a lot of money and time can achieve independently the diversification that can be obtained by purchasing mutual fund shares.
He totally disagreed.
He thought it was important to look for stocks with desired risk-return characteristics and then invest all your money in the best stock.
He was told by Walt that he was crazy.
He explained how he was acquainted with the measure of risk.
The higher the stock's risk, the higher its return.
He can use the Internet to find stocks that have an acceptable risk level for him.
One needs to be willing to accept the risk and hope for the best in order to be able todiversify.
Walt said he didn't think one could safely invest in a single stock.
He continued to argue that he had been told by his broker that a portfolio of stocks, such as a mutual fund, can be calculated with the same logic as a single stock.
As they continued to discuss their differing opinions, they began to get angry with each other.
Elinor Green, the company's vice president of finance, was standing nearby as they raised their voices.
She thought she might be able to resolve their disagreement because of her expertise on financial matters.
She asked them to explain the crux of their disagreement, and each reviewed his own viewpoint.
Elinor replied, "I have some good news and some bad news for you."
There is some validity to what you say, but there are some errors in your explanations.
The traditional approach to portfolio management is supported by Walt.
The company president interrupted them to talk to Elinor.
Elinor offered to continue their discussion after she apologized for having to leave.
Explain why a mutual fund investment may be overdiversified.
Explain why one doesn't have to have a lot of money to be adequately diversified.
Give a brief description of the traditional approach to portfolio management.
Give a brief description of modern portfolio theory and relate it to the approaches supported by them.
Diversifiable risk, undiversifiable risk, and total risk should be mentioned.
Susan Lussier is a tax accountant for a major oil and gas exploration company.
She makes $135,000 a year from her salary and participation in the company's drilling activities.
She is an expert on oil and gas taxation and is content with her income, so she can do what she wants.
Her current philosophy is to live each day to its fullest, not thinking about retirement, which is too far in the future.
Susan's father was killed in a sailing accident a month ago.
He retired two years ago and spent most of his time on the water.
He was the manager of a children's clothing manufacturing firm.
After retiring, he sold his stock in the firm and invested the proceeds in a security portfolio that provided him with supplemental retirement income of over $30,000 per year.
He left his entire estate to Susan.
In addition to a few family heirlooms, Susan received a security portfolio with a market value of nearly $350,000 and $10,000 in cash.
5 bonds, 2 common stocks, and 3 mutual funds were in Susan's father's portfolio.
The table shows the key characteristics of the securities.
Large, mature, well-known firms that had exhibited continuing patterns of dividend payment issued the common stocks.
Moderate growth potential was offered by the stocks.
Income funds invested in diversified portfolios of income-oriented stocks and bonds were in the portfolio.
Stable streams of dividend income were the only opportunities for capital appreciation.
Susan wants to know if the portfolio is suitable for her situation now that she owns it.
She knows that the high level of income provided by the portfolio will be taxed at a rate of 40%.
Susan plans to use the after-tax income to invest in common stocks with high capital gain potential.
She needs to avoid generating income that is taxed.
She feels fortunate to have received the portfolio and wants to make sure she gets the most out of it.
The cash left to her will be used to pay broker's commission associated with portfolio adjustments.
Susan needs to assess her financial situation and develop a portfolio objective that is in line with her needs.
Susan's father left her a portfolio.
Evaluate how well it is doing in fulfilling its apparent objective.
The asset allocation scheme is reflected in the portfolio.
You would recommend her to purchase securities if you knew the nature and mix of them.
The capital asset pricing model could be used to define the required returns for the two companies.
She uses the Get Quote box to research a source and then presses the Get Quote button.
The CAPM can be used to create a spreadsheet to deter the required rates of return.
The portfolio will be divided into two parts, one in a 60% and the other in a 40% split.
A weighted average can be calculated for both the returns and the portfolio.
We will visit United Rentals Inc., which was introduced at the beginning of the chapter.
The table shows the monthly return on the stock from January to December.
The average monthly return on the S&P 500 is calculated using an excel spreadsheet.
The standard deviation of monthly returns is calculated using an excel spreadsheet.
The returns of the S&P 500 on the horizontal axis of a graph are plotted in an excel spreadsheet.
Being certified as aCFA is the highest professional designation you can receive in the field of money management.
TheCFA charter is awarded to those candidates who successfully pass a series of three levels of exams, with each exam lasting six hours and covering a full range of investment topics.
You will find a small sample of questions similar to those that you might encounter on the Level I exam in the beginning of the second part of the text.
Some of the questions are similar to the ones you will find on the exam.
The topics covered in Parts 1 and 2 of this text include the time value of money, measures of risk and return, securities markets, and portfolio management.
A portfolio can grow over time in real terms to meet future needs.
Standard deviations are 8% and 15% for stocks A and B.
The correlation between the two stocks' returns has historically been 0.35.
The correlation coefficients between two securities change in a portfolio.
The risk is the sum of the standard deviations of the securities in the portfolio.
Faced with an efficient set of portfolios, an investor would choose the one with the highest expected return
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