Solution Manual For
Investments
By: Bodie
13 th Edition
1-1
,Table of Contents
PART I Introduction
1 The Investment Environment
2 Financial Markets, Asset Classes, and Financial Instruments
3 How Securities Are Traded
4 Mutual Funds and Other Investment Companies
PART II Portfolio Theory and Practice
5 Risk, Return, and the Historical Record
6 Capital Allocation to Risky Assets
7 Efficient Diversification
8 Index Models
PART III Equilibrium in Capital Markets
9 The Capital Asset Pricing Model
10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return
11 The Efficient Market Hypothesis
12 Behavioural Finance and Technical Analysis
13 Empirical Evidence on Security Returns
PART IV Fixed-Income Securities
14 Bond Prices and Yields
15 The Term Structure of Interest Rates
16 Managing Bond Portfolios PART V Security Analysis
17 Macroeconomic and Industry Analysis
18 Equity Valuation Models
19 Financial Statement Analysis
PART VI Options, Futures, and Other Derivatives
20 Options Markets: Introduction
21 Option Valuation
22 Futures Markets
23 Futures, Swaps, and Risk Management
PART VII Applied Portfolio Management
24 Portfolio Performance Evaluation
25 International Diversification
26 Hedge Funds
27 The Theory of Active Portfolio Management
28 Investment Policy and the Framework of the CFA Institute
1-2
, CHAPTER 1: THE INVESTMENT ENVIRONMENT
PROBLEM SETS
1. Ultimately, It Is True That Real Assets Determine The Material Well Being Of An
Economy. Nevertheless, Individuals Can Benefit When Financial Engineering Creates
New Products That Allow Them To Manage Their Portfolios Of Financial Assets More
Efficiently. Because Bundling And Unbundling Creates Financial Products With New
Properties And Sensitivities To Various Sources Of Risk, It Allows Investors To Hedge
Particular Sources Of Risk More Efficiently.
2. Securitization Requires Access To A Large Number Of Potential Investors. To Attract
These Investors, The Capital Market Needs:
(1) A Safe System Of Business Laws And Low Probability Of
Confiscatory Taxation/Regulation;
(2) A Well-Developed Investment Banking Industry;
(3) A Well-Developed System Of Brokerage And Financial Transactions, And;
(4) Well-Developed Media, Particularly Financial Reporting.
These Characteristics Are Found In (Indeed Make For) A Well-Developed Financial Market.
3. Securitization Leads To Disintermediation; That Is, Securitization Provides A Means
For Market Participants To Bypass Intermediaries. For Example, Mortgage-Backed
Securities Channel Funds To The Housing Market Without Requiring That Banks Or
Thrift Institutions Make Loans From Their Own Portfolios. As Securitization
Progresses, Financial Intermediaries Must Increase Other Activities Such As
Providing Short-Term Liquidity To Consumers And Small Business, And Financial
Services.
4. Financial Assets Make It Easy For Large Firms To Raise The Capital Needed To
Finance Their Investments In Real Assets. If General Motors, For Example, Could Not
Issue Stocks Or Bonds To The General Public, It Would Have A Far More Difficult
Time Raising Capital. Contraction Of The Supply Of Financial Assets Would Make
Financing More Difficult, Thereby Increasing The Cost Of Capital. A Higher Cost Of
Capital Results In Less Investment And Lower Real Growth.
1-3
, 5. Even If The Firm Does Not Need To Issue Stock In Any Particular Year, The Stock
Market Is Still Important To The Financial Manager. The Stock Price Provides Important
Information About How The Market Values The Firm's Investment Projects. For
Example, If The Stock Price Rises Considerably, Managers Might Conclude That The
Market Believes The Firm's Future Prospects Are Bright. This Might Be A Useful Signal
To The Firm To Proceed With An Investment Such As An Expansion Of The Firm's
Business.
In Addition, The Fact That Shares Can Be Traded In The Secondary Market Makes The
Shares More Attractive To Investors Since Investors Know That, When They Wish To,
They Will Be Able To Sell Their Shares. This In Turn Makes Investors More Willing To
Buy Shares In A Primary Offering, And Thus Improves The Terms On Which Firms Can
Raise Money In The Equity Market.
6. A. Cash Is A Financial Asset Because It Is The Liability Of The Federal Government.
b. No. The Cash Does Not Directly Add To The Productive Capacity Of The Economy.
c. Yes.
d. Society As A Whole Is Worse Off, Since Taxpayers, As A Group Will Make
Up For The Liability.
7. A. The Bank Loan Is A Financial Liability For Lanni. (Lanni's IOU Is The Bank's
Financial Asset.) The Cash Lanni Receives Is A Financial Asset. The New
Financial Asset Created Is Lanni's Promissory Note (That Is, Lanni’s IOU To The
Bank).
b. Lanni Transfers Financial Assets (Cash) To The Software Developers. In Return,
Lanni Gets A Real Asset, The Completed Software. No Financial Assets Are
Created Or Destroyed; Cash Is Simply Transferred From One Party To Another.
c. Lanni Gives The Real Asset (The Software) To Microsoft In Exchange For A
Financial Asset, 1,500 Shares Of Microsoft Stock. If Microsoft Issues New Shares
In Order To Pay Lanni, Then This Would Represent The Creation Of New Financial
Assets.
d. Lanni Exchanges One Financial Asset (1,500 Shares Of Stock) For Another
($120,000). Lanni Gives A Financial Asset ($50,000 Cash) To The Bank And Gets
Back Another Financial Asset (Its IOU). The Loan Is "Destroyed" In The
Transaction, Since It Is Retired When Paid Off And No Longer Exists.
1-4
Investments
By: Bodie
13 th Edition
1-1
,Table of Contents
PART I Introduction
1 The Investment Environment
2 Financial Markets, Asset Classes, and Financial Instruments
3 How Securities Are Traded
4 Mutual Funds and Other Investment Companies
PART II Portfolio Theory and Practice
5 Risk, Return, and the Historical Record
6 Capital Allocation to Risky Assets
7 Efficient Diversification
8 Index Models
PART III Equilibrium in Capital Markets
9 The Capital Asset Pricing Model
10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return
11 The Efficient Market Hypothesis
12 Behavioural Finance and Technical Analysis
13 Empirical Evidence on Security Returns
PART IV Fixed-Income Securities
14 Bond Prices and Yields
15 The Term Structure of Interest Rates
16 Managing Bond Portfolios PART V Security Analysis
17 Macroeconomic and Industry Analysis
18 Equity Valuation Models
19 Financial Statement Analysis
PART VI Options, Futures, and Other Derivatives
20 Options Markets: Introduction
21 Option Valuation
22 Futures Markets
23 Futures, Swaps, and Risk Management
PART VII Applied Portfolio Management
24 Portfolio Performance Evaluation
25 International Diversification
26 Hedge Funds
27 The Theory of Active Portfolio Management
28 Investment Policy and the Framework of the CFA Institute
1-2
, CHAPTER 1: THE INVESTMENT ENVIRONMENT
PROBLEM SETS
1. Ultimately, It Is True That Real Assets Determine The Material Well Being Of An
Economy. Nevertheless, Individuals Can Benefit When Financial Engineering Creates
New Products That Allow Them To Manage Their Portfolios Of Financial Assets More
Efficiently. Because Bundling And Unbundling Creates Financial Products With New
Properties And Sensitivities To Various Sources Of Risk, It Allows Investors To Hedge
Particular Sources Of Risk More Efficiently.
2. Securitization Requires Access To A Large Number Of Potential Investors. To Attract
These Investors, The Capital Market Needs:
(1) A Safe System Of Business Laws And Low Probability Of
Confiscatory Taxation/Regulation;
(2) A Well-Developed Investment Banking Industry;
(3) A Well-Developed System Of Brokerage And Financial Transactions, And;
(4) Well-Developed Media, Particularly Financial Reporting.
These Characteristics Are Found In (Indeed Make For) A Well-Developed Financial Market.
3. Securitization Leads To Disintermediation; That Is, Securitization Provides A Means
For Market Participants To Bypass Intermediaries. For Example, Mortgage-Backed
Securities Channel Funds To The Housing Market Without Requiring That Banks Or
Thrift Institutions Make Loans From Their Own Portfolios. As Securitization
Progresses, Financial Intermediaries Must Increase Other Activities Such As
Providing Short-Term Liquidity To Consumers And Small Business, And Financial
Services.
4. Financial Assets Make It Easy For Large Firms To Raise The Capital Needed To
Finance Their Investments In Real Assets. If General Motors, For Example, Could Not
Issue Stocks Or Bonds To The General Public, It Would Have A Far More Difficult
Time Raising Capital. Contraction Of The Supply Of Financial Assets Would Make
Financing More Difficult, Thereby Increasing The Cost Of Capital. A Higher Cost Of
Capital Results In Less Investment And Lower Real Growth.
1-3
, 5. Even If The Firm Does Not Need To Issue Stock In Any Particular Year, The Stock
Market Is Still Important To The Financial Manager. The Stock Price Provides Important
Information About How The Market Values The Firm's Investment Projects. For
Example, If The Stock Price Rises Considerably, Managers Might Conclude That The
Market Believes The Firm's Future Prospects Are Bright. This Might Be A Useful Signal
To The Firm To Proceed With An Investment Such As An Expansion Of The Firm's
Business.
In Addition, The Fact That Shares Can Be Traded In The Secondary Market Makes The
Shares More Attractive To Investors Since Investors Know That, When They Wish To,
They Will Be Able To Sell Their Shares. This In Turn Makes Investors More Willing To
Buy Shares In A Primary Offering, And Thus Improves The Terms On Which Firms Can
Raise Money In The Equity Market.
6. A. Cash Is A Financial Asset Because It Is The Liability Of The Federal Government.
b. No. The Cash Does Not Directly Add To The Productive Capacity Of The Economy.
c. Yes.
d. Society As A Whole Is Worse Off, Since Taxpayers, As A Group Will Make
Up For The Liability.
7. A. The Bank Loan Is A Financial Liability For Lanni. (Lanni's IOU Is The Bank's
Financial Asset.) The Cash Lanni Receives Is A Financial Asset. The New
Financial Asset Created Is Lanni's Promissory Note (That Is, Lanni’s IOU To The
Bank).
b. Lanni Transfers Financial Assets (Cash) To The Software Developers. In Return,
Lanni Gets A Real Asset, The Completed Software. No Financial Assets Are
Created Or Destroyed; Cash Is Simply Transferred From One Party To Another.
c. Lanni Gives The Real Asset (The Software) To Microsoft In Exchange For A
Financial Asset, 1,500 Shares Of Microsoft Stock. If Microsoft Issues New Shares
In Order To Pay Lanni, Then This Would Represent The Creation Of New Financial
Assets.
d. Lanni Exchanges One Financial Asset (1,500 Shares Of Stock) For Another
($120,000). Lanni Gives A Financial Asset ($50,000 Cash) To The Bank And Gets
Back Another Financial Asset (Its IOU). The Loan Is "Destroyed" In The
Transaction, Since It Is Retired When Paid Off And No Longer Exists.
1-4
