Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 18, Problem 13PS
Conventional wisdom says that one should measure a manager’s investment performance over an entire market cycle. What arguments support this convention? What arguments contradict it?
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Conventional wisdom says that one should measure a manager’s investment performance over an entire market cycle. What arguments support this convention? What arguments contradict it?
Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which:
successful strategies will not be reflected in accounting profits for a number of periods.
the price/earnings ratio is commonly greater than 12.
profits may be the subject of manipulation by managers.
capital investment is not an important strategic decision.
Explain and give an example as to how a manager can manipulate the return on investment figure in the short run. Why are these manipulations bad for the company in the long run? Suggest some alternative performance evaluation and compensation schemes.
Chapter 18 Solutions
Essentials Of Investments
Ch. 18.1 - Prob. 1EQCh. 18.1 - Which fund would you choose if you were...Ch. 18.6 - Prob. 1EQCh. 18.6 - What would happen to the contribution of security...Ch. 18 - Prob. 1PSCh. 18 - Is it possible for a positive alpha to be...Ch. 18 - Prob. 3PSCh. 18 - Prob. 5PSCh. 18 - 6. stock price and dividend history are as...Ch. 18 - Prob. 7PS
Ch. 18 - Based on current dividend yields and expected...Ch. 18 - Consider the two (excess return) index~m0del...Ch. 18 - Prob. 10PSCh. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Conventional wisdom says that one should measure a...Ch. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Bill Smith is evaluating the performance of four...Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 21PSCh. 18 - Prob. 22PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - What is the Sharpe performance measure for...Ch. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CPCh. 18 - Prob. 12CPCh. 18 - Prob. 13CPCh. 18 - Prob. 14CPCh. 18 - Prob. 1WMCh. 18 - Prob. 2WMCh. 18 - Prob. 3WMCh. 18 - Prob. 4WMCh. 18 - Prob. 5WMCh. 18 - Prob. 7WM
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- Which of the following statement(s) is/are not true? i. Return On Investment (ROI) as a performance measure may discourage managers of divisions with high ROIs to invest in projects with lower ROIs that are acceptable to the organization as a whole. ii. ROI incorporates the firm’s opportunity cost of acquiring investment capital. iii. Under Residual Income (RI), rates of return can be adjusted to take into account differences in risks for different investment assets. iv. Both ROI and RI use a percentage measure. v. ROIs cannot be used to compare divisions of differing sizes. Multiple Choice ii, iv and v ii, iii and iv i, ii and iii i and ii i onlyarrow_forwardWhich of the following statement(s) is/are not true? i. Return On Investment (ROI) as a performance measure may discourage managers of divisions with high ROIs to invest in projects with lower ROIs that are acceptable to the organization as a whole. ii. ROI incorporates the firm’s opportunity cost of acquiring investment capital. iii. Under Residual Income (RI), rates of return can be adjusted to take into account differences in risks for different investment assets. iv. Both ROI and RI use a percentage measure. v. ROIs cannot be used to compare divisions of differing sizes. Multiple Choice a)i, ii and iii b)ii, iv and v c)i only d)i and ii e)ii, iii and ivarrow_forwardWhich of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same?arrow_forward
- How can managers determine the breakeven point or the output needed to achieve a target operating income? 2) How can managers incorporate income taxes into CVP analysis?arrow_forwardIf markets are truly efficient, does it matter whether firms engage in earnings management? On the other hand, if firms manage earnings, what does that say about management’s view on efficient markets?arrow_forwardWhy do managers want a high ROI, and how would they strive to increase their ROI?arrow_forward
- Which of the following is not included in the Dupont framework? a. a measure of profitability c. a measure of leverage b. a measure of efficiency d. a measure of market sharearrow_forward1. What is the controllable margin of Greer Company? 2. What is the return on investment of Greer Company?arrow_forwardWhat does the Law of Large Numbers tell us about investment managers’ performance? a. That great performance may sometimes come out of pure luck. b. That it is only due to luck. c. That it requires a great deal of competence to overcome bad luck. d. That a manager’s performance due to luck is inversely proportional to her performance achievementarrow_forward
- In a world of much friction and imbalance, discuss how Miller and Modigliani (M&M) arrive at the conclusion that capital structure is "irrelevant" and how important is the assumption of fixed investment policy to this conclusion? (Word count-100 words)arrow_forwardHow can managers determine the breakeven point or the output needed to achieve a target operating income? 2) How can managers incorporate income taxes into CVP analysis? Permalink ◄ eTutor Presentation on Unit 3 cont'darrow_forwardWhich of the following is not a measure that management can use in evaluating and controlling investment center performance? a.residual income b.negotiated price c.income from operations d.rate of return on investmentarrow_forward
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