Chapter 13, Problem 2IEE

The file Fortune500 contains data for profits and market capitalizations from a recent sample of firms in the Fortune 500 a. Prepare a scatter diagram to show the relationship between the variables Market Capitalization and Profit in which Market Capitalization is on the vertical axis and Profit is on the horizontal axis. Comment on any relationship between the variables. b. Create a trendline for the relationship between Market Capitalization and Profit. What does the trendline indicate about this relationship?

The scatter chart in the following figure was created using sample data for profits and market capitalizations from a sample of firms in the Fortune 500. a. Discuss what the scatter chart indicates about the relationship between profits and market capitalization? b. The data used to produce this are contained in the file Fortune500. Calculate the covariance between profits and market capitalization. Discuss what the covariance indicates about the relationship between profits and market capitalization? c. Calculate the correlation coefficient between profits and market capitalization. What does the correlations coefficient indicate about the relationship between profits and market capitalization?

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?

Below are two alternative strategies under consideration by an investment fi rm:Strategy A : Invest in stocks that are components of a global equity index, have aROE above the median ROE of all stocks in the index, and have a P/E less thanthe median P/E.Strategy B : Invest in stocks that are components of a broad-based US equity index,have a ratio of price to operating cash fl ow in the lowest quartile of companies inthe index, and have shown increases in sales for at least the past three years.Both strategies were developed with the use of back-testing.1 . How would you characterize the two strategies?2 . What concerns might you have about using such strategies?

You determined that the returns from Grain Processing Inc (GPI) are normally distributed with a mean of 10% and standard deviation of 8%. In addition, you are confident that past returns are good indicators of future returns. If you buy shares in GPI.  answer in Finance terms, not Satistics.   a) What is the probability that your return will be negative?    b) What is the probability that your return will be above 16%?

The stock market data is given in the following table. Correlation Coefficients   Telmex Mexico World SD(%) R¯¯¯�¯ (%) Telmex 1.00 0.90 0.60 18 ? Mexico   1.00 0.75 15 14 World     1.00 10 12 The above table provides the correlations among Telmex, a telephone or communication company located in Mexico, the Mexico stock market index, and the world market index, together with the standard deviations (SD) of returns and the expected returns ( R¯¯¯R¯ ). The risk-free rate is 8%. Required: Suppose now that Telmex has made its shares tradable internationally via cross-listing on NYSE. Again using the CAPM paradigm, estimate Telmex’s equity cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Assume you are given the following information for firms A and B:   A B D $1,563,400.00 $2,357,316.00 E $2,051,347.00 $1,257,431.00 Price $31.25 $31.25 i 13.52% 13.52% EBIT $97,347.00 $97,347.00 No taxes     How do you replicate an investment in 79% of stock B by using stock A? What is the return of the replicating strategy?

Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.   In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? The intrinsic value of a stock is based only on perceived investor returns.   A stock’s market price is often based on investors’ perceived risk in the company.     You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model.…

A global equity manager is assigned to select stocks from a universe of large stocks throughout the world. The manager will be evaluated by comparing her returns to the return on the MSCI World Market Portfolio, but she is free to hold stocks from various countries in whatever proportions she finds desirable. Results for a given month are contained in the following table: Country Weight In MSCI Index Manager's Weight Manager's Return in Country Return of Stock Index for That Country U.K. 0.26 0.33 22% 13% Japan 0.39 0.3 16 % 16% U.S. 0.34 0.25 10% 12% Germany 0.01 0.12 6% 13 % Required: Calculate the total value added of all the manager's decisions this period. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign. Calculate the value added (or subtracted) by her country allocation decisions. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be…