Basic Measures, Policy Statements, and Securities Markets -1

Solving the Questions

Basic Measures, Policy Statement, and

Securities Market

Strayer University

Dr. Bliss : Finance 550, Fall 2010

Mehmet F. Celik

7015791091
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1.
a.

A.M. stock A = 0.09 + 0.05 + (-0.06) + 0.04 + 0.06 / 5 = 0.036 = 3.6%

A.M. stock B = 0.2 + 0.1 + (-0.13) + (-0.04) + 0.16 / 5 = 0.058 = 5.8%

According to the arithmetic mean, a higher return on Stock B seems to me

most desirable, so these results lead us to prefer Stock B.

b.

Standard Deviation stock A = 0.056833089 = 5.68%

Standard Deviation stock B = 0,138996403 = 13.90%

Standard Deviation shows that Stock A would be preferred instead of Stock B.

c.

Coefficient of Variation stock A = 1,578696915

Coefficient of Variation stock B = 2,396489704

In these results we can say that Stock B should be chosen.

d.

G.M. stock A = 0.034 = 3.4%

G.M. stock B = 0.05 = 5%

The geometric mean to direct us to prefer Stock B

2.

Objective

Mr. Lewis 60 years old and in the near time he lost his wife since she had a disease that killed

her. But, he believes that a cure can be found for that disease, therefore he has decided that a
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medical research foundation will receive half the proceeds now and will be the primary

beneficiary of his estate upon his death. He has no children and is in excellent health, he is

regular person, and however, he keeps dynamic lifestyle.

Constraints

Liquidity needs:

I always defend one thesis that people who are pretty much end of the middle age like Mr.

Lewis is, should be interested in less the long term investment than their short term plans.

Because, they do not have enough time and energy for recover from their own financial

mistakes. Therefore, Mr. Lewis should keep more cash or similar liquid such as treasure

bonds, treasure bills, etc.

Time Horizon:

As I said above, regardless of what kind investments currently he has, he needs more liquidity

with short term investments, since he can not tolerate high risk instead of moderate or less

portfolio risk. However, he has to keep at least the same value of wealth against the inflation

that he should be interested in long term investment such as Large Cap Stock that it protects

his wealth against the inflation.

Tax Concerns:

He is in a high tax bracket prior to retiring and, so he will seek tax-exempt income and tax-

deferred investments. He will need to have tax-deferred investments or tax-exempt income

which will become less. He must be aware of perception of large capital gains during

diversify against it.

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Legal and Regulatory Factors:

He should set up trust account if he has not done it yet. He should seek a financial advisor

who will show him the way for financial plans to obey laws and regulations and to implement

plans properly.

Unique Needs and Preferences

Investors may determine the way basis of personal preferences or social consciousness

reasons. Mr. Lewis has committed his investments to a foundation for the disease that killed

his wife.

Suggested Asset Allocation

TOTAL ASSET 100 % $31,500,000

Large cap stock 20% $6,300,000

Mid cap stock 9% $2,835,000
Small cap stock 5% $1,575,000
Foreign stock 7% $2,205,000
Bonds 23.41% $7,374,150
Municipal bonds 0% $0
Cash 34% $13,600,000
Real Estate 1.59% $500,850
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3.
HPR = Ending Value / Beginning Value
HPY = HPR – 1

Let’s compute rate of return for $45

HPR1 = $40 / $45 = 0.88
HPY1 = 0.89 – 1 = - 0.11 = -11 %

HPR2 = $60 / $45 = 1.33

HPY2 = 1.33 – 1 = 0.33 = 33 %

A.M. = (-0.11) + 0.33 / 2 = 0.11 = 11 % that means we can make profits by the limit buy
order

We assume that we put in a market order

HPR1 = $40 / $50 = 0.8
HPY1 = 0.8 – 1 = - 0.20 = -20%

HPR2 = $60 / $50 = 1.2

HPY2 = 1.2 – 1 = 0.20 = 20%

A.M. = (-0.20) + 0.20 / 2 = 0 = 0% it gives us nothing.

Let’s try to our chance at $38

HPR1 = $40 / $38 = 1.05

HPY1 = 1.05 – 1 = 0.05 = 5%

HPR2 = $60 / $38 = 1.58

HPY2 = 1.58 – 1 = 0.58 = 58%

A.M. = 0.05 + 0.58 / 2 = 0.315 = 31.5% this is the best choice to make the most profit.

4.

DAYS /
Company IBM JNJ CAT MCD HD AVERAGE
11 October 4.004.300,00 6.172.100,00 4.593.700,00 3.653.400,00 8.358.700,00 5.356.440,00
12 October 5.637.300,00 8.707.400,00 10.034.200,00 4.703.500,00 12.539.000,00 8.324.280,00
13 October 8.784.300,00 10.074.900,00 8.493.200,00 4.370.700,00 15.247.200,00 9.394.060,00
14 October 5.653.100,00 8.632.700,00 5.663.900,00 6.616.400,00 11.242.500,00 7.561.720,00
15 October 7.220.400,00 13.241.800,00 6.522.900,00 6.259.200,00 12.945.300,00 9.237.920,00
AVERAGE 6.259.880,00 9.365.780,00 7.061.580,00 5.120.640,00 12.066.540,00 39.874.420,00

DAYS /
Company AAPL DELL GOOG CSCO MSFT AVERAGE
11 October 15.245.400,00 16.233.300,00 2.626.300,00 28.424.200,00 27.552.800,00 18.016.400,00
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12 October 19.897.900,00 42.974.700,00 3.753.600,00 35.062.400,00 50.060.300,00 30.349.780,00
13 October 22.215.400,00 25.942.700,00 3.055.600,00 66.076.700,00 75.116.704,00 38.481.420,80
14 October 15.491.800,00 29.440.100,00 6.596.400,00 38.815.500,00 51.949.100,00 28.458.580,00
15 October 32.804.800,00 28.156.200,00 14.813.100,00 50.218.500,00 68.920.200,00 38.982.560,00
AVERAGE 21.131.060,00 28.549.400,00 6.169.000,00 43.719.460,00 54.719.820,80 154.288.740,80

a. First sample that you have given us is 39.874.420, 00 while other sample that we

selected randomly from the NASDAQ indicates 154.288.740, 80.

b. Of course, I would expect this difference to have an impact on the efficiency of the

markets for two samples. If we explain this issue briefly and clearly; we should point out

status of volume in the stock market. Volume is so important indicator in technical

analysis to measure the worth of market move. This explanation makes NASDAQ has a

little more volume than others, because NASDAQ provides easy access to investors,

especially dealers who create liquid markets by purchasing and selling against personal

inventory, whereas NYSE is an example of an auction market.

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