SOLUTIONS MANUAL
** All Chapters included
** Questions & case study
** Problems Solutions Excel
** Student Excel Files
,Table of Contents are given below
1. Introduction to Investments.
2. Types and Attributes of Financial Instruments.
3. Securities Markets and Transactions.
4. Mutual Funds and Other Investment Companies.
5. Measuring Return and Risk.
6. Portfolios and Diversification.
7. Risk-Free and Risky Asset Allocation and the CAPM.
8. Asset Pricing Models and Efficient Markets.
9. Portfolio Performance Analytics.
10. The Macroeconomic Environment for Investment Decisions.
11. Valuing Common Stock.
12. Valuing Preferred Stock.
13. Valuing Corporate Bonds.
14. Valuing Government Securities.
15. An Introduction to Futures Contracts and Options.
16. Derivative Valuation and Strategies.
17. Technical Analysis.
, Solution and Answer Guide: Adair/Nofsinger 9798214056944; 2nd Edition; Chapter 1: Introduction to Investments
Solution and Answer Guide
ADAIR/NOFSINGER 9798214056944; 2ND EDITION; CHAPTER 1: INTRODUCTION TO INVESTMENTS
TABLE OF CONTENTS
Questions...................................................................................................................................................... 1
Case Study ................................................................................................................................................... 5
QUESTIONS
1. Real vs. Financial Assets Compare and contrast real assets with financial assets.
(LO 1-1)
Real assets are assets that either contribute to production or which create income or wealth. Most real assets
have a physical existence, with the most common examples being real estate and land, machinery, precious
metals, and commodities. However, certain intangible assets like patents, trademarks, and intellectual
property can also create income, so they are considered real assets too.
Financial assets are non-physical assets whose values are derived from either a contractual claim on real
assets or on the cash flows produced by those real assets. Examples of financial assets include stocks,
bonds, cash, bank deposits, certificate of deposits (CDs), loans made, corporate receivables, derivative
securities, and cryptocurrencies.
The difference between real and financial assets can be viewed as real assets are those used to produce
economic output while financial assets serve to allocate how that output is divided up.
2. Capital Flow: Corporate vs. Investor View Regarding the flow of capital between investors,
corporations, and the government, how does the view of the corporation differ from the view of the
investor? (LO 1-2)
Investors provide money to companies as capital. The companies use that capital to invest in projects.
When the projects return cash flows to the firm, any profits are usually subject to taxation by federal, state,
and/or local governments. Of the remaining, after-tax, profits, some are retained in the firm to fund future
operations and the rest are paid out to investors.
The corporation view of this system focus on decisions concerning; (1) the form and amount of funding
received from investors, (2) which projects to put the funds in, (3) how to manage taxes, and (4) how much
of the revenues of existing projects to keep versus paying back the firm’s investors.
The investors view of this system focus on decisions such as; (1) which firms and what types of financial
instruments to invest in, (2) what terms and maturities of return cash flows to seek, and (3) how to best
manage the timing and amounts of taxes paid.
3. Capital Flow Factors What are the complicating factors that make the flow of capital among corporations
and investors uncertain? (LO 1-2)
Some of the complicating factors that make the flow of capital among corporations and investors uncertain
are the following.
1
, Solution and Answer Guide: Adair/Nofsinger 9798214056944; 2nd Edition; Chapter 1: Introduction to Investments
The return from the projects invested by firms are not always positive and those investments are not always
profitable. Many times the demand for the goods and services produced by those projects are subject to
change over time in a competitive macroeconomic environment. That change could negatively affect the
firm’s operations as well as their ability to sell those products and services at their hoped-for prices.
Firms’ earnings can fluctuate and are not always as expected. Therefore a firm cannot guarantee the amount
and timing of the returns they can give back to investors. Even if firms could perfectly forecast the before-
tax returns from their operations, they have no control over government tax regulations that impact final
cash flows.
Furthermore, the prices of financial assets change because of those uncertainties, and as more information
arrives about a particular company, the valuation of those assets change also, which makes the price that
the investor pay for those assets change also. Finally, there are a very large number of financial assets
where investors can invest which make investing choices more complicated.
4. Valuation What factors are involved in assessing value? (LO 1-3)
Valuation of assets is the process of determining what an asset is worth today. The valuation of assets are
based on finding the today’s value of all the expected future cash flows the asset will provide over the life
of the asset.
From this definition, we see that there are three factors involved in valuing the asset: the life of the asset,
the expected cash flows the asset will provide over its life and the risk of those cash flows to determine the
discount rate used to find the present value of the cash flows.
Those factors vary from one asset to the other and make the valuation process complicated. For example
the expected cash flows on bonds are easier to determine and calculate while the expected cash flows on
stocks are much more difficult to predict. Some assets have finite lives, while others have infinite lives.
Also, the riskiness of assets are not the same, which requires different discount rates.
5. Risk Aversion What are the ramifications of an investor being risk averse? (LO 1-3)
It is assumed that most rational investors are generally risk averse. This means that they will only take risk
when they feel they will be compensated for the risk with a higher expected return. But that doesn’t mean
they’re all equally risk averse. An investor with a long-time horizon and considerable additional savings
can afford to take risks that someone with a shorter horizon and less savings would be uncomfortable with.
Because of the differences in risk aversion, people invest in different types of assets with different risk
profiles. A more risk averse investor would invest in less risky assets such as government bonds, while a
less risk averse investor would invest in a more risky assets such as stocks.
6. Market Efficiency Why might a market be efficient? (LO 1-4)
Financial markets are competitive markets where investors participate freely in the purchase and sale of
stocks and bonds. Virtually anyone, from a child to a grandmother, may own an investment, even if it is
just a savings account. Competitive financial markets also tend to be extremely efficient at making sure that
new information is rapidly taken into account by valuations. If new information suggests that cash flows
from different assets will be different than previously thought, the market rapidly adjusts the asset’s price.
Thus, an efficient financial market implies that a security’s current price embodies all the known
information concerning its potential return and risk.
7. Asset Specific Risk What is an asset-specific risk and how does it relate to portfolio diversification? (LO
1-5)
An asset-specific risk, which is also called unsystematic risk or diversifiable risk, is a type of risk that is
only related to one particular asset and doesn’t affect the other assets in the market. For example, if the
2
** All Chapters included
** Questions & case study
** Problems Solutions Excel
** Student Excel Files
,Table of Contents are given below
1. Introduction to Investments.
2. Types and Attributes of Financial Instruments.
3. Securities Markets and Transactions.
4. Mutual Funds and Other Investment Companies.
5. Measuring Return and Risk.
6. Portfolios and Diversification.
7. Risk-Free and Risky Asset Allocation and the CAPM.
8. Asset Pricing Models and Efficient Markets.
9. Portfolio Performance Analytics.
10. The Macroeconomic Environment for Investment Decisions.
11. Valuing Common Stock.
12. Valuing Preferred Stock.
13. Valuing Corporate Bonds.
14. Valuing Government Securities.
15. An Introduction to Futures Contracts and Options.
16. Derivative Valuation and Strategies.
17. Technical Analysis.
, Solution and Answer Guide: Adair/Nofsinger 9798214056944; 2nd Edition; Chapter 1: Introduction to Investments
Solution and Answer Guide
ADAIR/NOFSINGER 9798214056944; 2ND EDITION; CHAPTER 1: INTRODUCTION TO INVESTMENTS
TABLE OF CONTENTS
Questions...................................................................................................................................................... 1
Case Study ................................................................................................................................................... 5
QUESTIONS
1. Real vs. Financial Assets Compare and contrast real assets with financial assets.
(LO 1-1)
Real assets are assets that either contribute to production or which create income or wealth. Most real assets
have a physical existence, with the most common examples being real estate and land, machinery, precious
metals, and commodities. However, certain intangible assets like patents, trademarks, and intellectual
property can also create income, so they are considered real assets too.
Financial assets are non-physical assets whose values are derived from either a contractual claim on real
assets or on the cash flows produced by those real assets. Examples of financial assets include stocks,
bonds, cash, bank deposits, certificate of deposits (CDs), loans made, corporate receivables, derivative
securities, and cryptocurrencies.
The difference between real and financial assets can be viewed as real assets are those used to produce
economic output while financial assets serve to allocate how that output is divided up.
2. Capital Flow: Corporate vs. Investor View Regarding the flow of capital between investors,
corporations, and the government, how does the view of the corporation differ from the view of the
investor? (LO 1-2)
Investors provide money to companies as capital. The companies use that capital to invest in projects.
When the projects return cash flows to the firm, any profits are usually subject to taxation by federal, state,
and/or local governments. Of the remaining, after-tax, profits, some are retained in the firm to fund future
operations and the rest are paid out to investors.
The corporation view of this system focus on decisions concerning; (1) the form and amount of funding
received from investors, (2) which projects to put the funds in, (3) how to manage taxes, and (4) how much
of the revenues of existing projects to keep versus paying back the firm’s investors.
The investors view of this system focus on decisions such as; (1) which firms and what types of financial
instruments to invest in, (2) what terms and maturities of return cash flows to seek, and (3) how to best
manage the timing and amounts of taxes paid.
3. Capital Flow Factors What are the complicating factors that make the flow of capital among corporations
and investors uncertain? (LO 1-2)
Some of the complicating factors that make the flow of capital among corporations and investors uncertain
are the following.
1
, Solution and Answer Guide: Adair/Nofsinger 9798214056944; 2nd Edition; Chapter 1: Introduction to Investments
The return from the projects invested by firms are not always positive and those investments are not always
profitable. Many times the demand for the goods and services produced by those projects are subject to
change over time in a competitive macroeconomic environment. That change could negatively affect the
firm’s operations as well as their ability to sell those products and services at their hoped-for prices.
Firms’ earnings can fluctuate and are not always as expected. Therefore a firm cannot guarantee the amount
and timing of the returns they can give back to investors. Even if firms could perfectly forecast the before-
tax returns from their operations, they have no control over government tax regulations that impact final
cash flows.
Furthermore, the prices of financial assets change because of those uncertainties, and as more information
arrives about a particular company, the valuation of those assets change also, which makes the price that
the investor pay for those assets change also. Finally, there are a very large number of financial assets
where investors can invest which make investing choices more complicated.
4. Valuation What factors are involved in assessing value? (LO 1-3)
Valuation of assets is the process of determining what an asset is worth today. The valuation of assets are
based on finding the today’s value of all the expected future cash flows the asset will provide over the life
of the asset.
From this definition, we see that there are three factors involved in valuing the asset: the life of the asset,
the expected cash flows the asset will provide over its life and the risk of those cash flows to determine the
discount rate used to find the present value of the cash flows.
Those factors vary from one asset to the other and make the valuation process complicated. For example
the expected cash flows on bonds are easier to determine and calculate while the expected cash flows on
stocks are much more difficult to predict. Some assets have finite lives, while others have infinite lives.
Also, the riskiness of assets are not the same, which requires different discount rates.
5. Risk Aversion What are the ramifications of an investor being risk averse? (LO 1-3)
It is assumed that most rational investors are generally risk averse. This means that they will only take risk
when they feel they will be compensated for the risk with a higher expected return. But that doesn’t mean
they’re all equally risk averse. An investor with a long-time horizon and considerable additional savings
can afford to take risks that someone with a shorter horizon and less savings would be uncomfortable with.
Because of the differences in risk aversion, people invest in different types of assets with different risk
profiles. A more risk averse investor would invest in less risky assets such as government bonds, while a
less risk averse investor would invest in a more risky assets such as stocks.
6. Market Efficiency Why might a market be efficient? (LO 1-4)
Financial markets are competitive markets where investors participate freely in the purchase and sale of
stocks and bonds. Virtually anyone, from a child to a grandmother, may own an investment, even if it is
just a savings account. Competitive financial markets also tend to be extremely efficient at making sure that
new information is rapidly taken into account by valuations. If new information suggests that cash flows
from different assets will be different than previously thought, the market rapidly adjusts the asset’s price.
Thus, an efficient financial market implies that a security’s current price embodies all the known
information concerning its potential return and risk.
7. Asset Specific Risk What is an asset-specific risk and how does it relate to portfolio diversification? (LO
1-5)
An asset-specific risk, which is also called unsystematic risk or diversifiable risk, is a type of risk that is
only related to one particular asset and doesn’t affect the other assets in the market. For example, if the
2
