Understanding Investments,
Theories and Strategies, 2nd
Edition by Nikiforos T. Laopodis
Complete Chapter are included
(Ch 1 to 16)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
Chapter 1 The Investment Framework
Chapter 2 The Investment Decision Process and Investment Strategies
Chapter 3 Fundamentals of Risk and Return
Chapter 4 The Global Financial Environment
Chapter 5 Money and Capital Markets, Instruments and Strategies
Chapter 6 Investment Bankers and Investment Companies
Chapter 7 Diversification and Asset Allocation
Chapter 8 Efficient Diversification and Capital Market Theory
Chapter 9 Market Efficiency and Behavioral Finance
Chapter 10 Equity and Fundamental Analyses
Chapter 11 Equity Valuation and Investment Strategies
Chapter 12 Bond Fundamentals and Valuation
Chapter 13 Bond Portfolio Management and Performance Evaluation
Chapter 14 Option Markets and Valuation Models
Chapter 15 Futures Markets and Strategies
Chapter 16 Other Topics in Investments
, CHAPTER 1
The Investment Framework
1. As a potential investor, what would be your objective(s) and constraints? What major trade-
offs do you face?
The answer depends on the student. In general, all investors face quantitative and
qualitative constraints. For example, constraints include resources, age and preferences and
objectives include wealth maximization or satisfaction of some future liability. One tradeoff is
the balancing between risk and return since higher expected return entails assuming more risk.
2. Why is it inappropriate to say ‘I want to make as much money on my investments as possible’?
What are you ignoring?
Such talk is meaningless. You ignore the other side of the situation – risk. Remember,
that there is a trade off between risk and return and these cannot be separated.
3. Take a look at the cafeteria in your college campus. You and most of other students go there
on a daily basis for food and drinks. If the male person working there to serve you is always
shirking his work responsibilities, how would you advise him in order to keep his job?
The obvious answer would be to advise him to rise up to his responsibilities. By not
doing his part, other co-workers are filling in and thus costs, explicit and implicit, rise. For
example, other co-workers may not do his job efficiently and effectively resulting in waste of
time, and resources. In addition, customer wait may become a factor which also, indirectly, will
contribute to the cost of service and thus a higher price for you, the customer. As a result, you
should advise him to take seriously his responsibilities or simply find another job.
4. We discussed the conflicts that arise between a company’s manager and its stakeholders.
Can you suggest some other ways to align a manager’s goals to those of the firm’s owners?
You might want to scour The Wall Street Journal to find some relevant articles.
The answer is left to the student.
5. Consider the following scenario. Suppose your parents ask their neighbor (who consistently
pays attention to the stock market because he is an active investor) for advice on a particular
stock. Your parents wish to decide if it makes sense to buy the stock. If the neighbor’s opinion
on the stock is favorable and says that the company will do fine in the future, is such a statement
unethical? Answer the question assuming that your parents thought that your neighbor’s
opinion was based on a good knowledge of the company.
It depends. For example, if your neighbor had prior knowledge that the company is
about to go under and misled you into buying stock from that company, then it would most
1
, likely be unethical behavior. If not, then it would not matter. You should also question your
neighbor’s motives for suggesting such a purchase. What could possibly be his benefit from
doing so?
6. We discussed the conflicts that arise between existing and new stockholders when
management wishes to undertake new projects financed by equity. Now, consider the following
scenario. The management of the firm has no other means of financing a new risky project but
to sell bonds. If bondholders knew of the project’s riskiness (which might be greater that they
would be willing to bear), they would outright refuse to provide the funds. Explain the outcome
of such behavior by the bondholders. Do we have an instance of market failure? What if the
bondholders did not know of the project’s risk? What impact would that have on the
bondholders’ wealth (relative to that of the stockholders)?
Bondholders would pursue this action because they know that more debt lowers the
value of existing debt. Thus, creditors, old and new alike, will be put at risk. Moreover, if the
project is successful, the benefits would exclusively accrue to shareholders but not to
bondholders because they only get a fixed return. On the other hand, if the project goes sour,
then creditors might also share the loss. From the shareholders’ point of view, this situation is
‘heads I win, tails you lose’ game, which may not be viewed well by creditors.
The agent-principal conflict is relevant in this case. This conflict arises because the
stockholders know that if the project goes sour they will lose but the creditors will still be paid.
7. We discussed social responsibility in the text. Can you advance an argument for the
mandatory and for the non-voluntary requirement of such behavior for firms by government
law?
It will, in general, be difficult (if not politically possible) for the government to impose
mandatory restrictions on social responsibility actions of firms. Firms typically find it beneficial
to engage in socially desirable actions because their profitability is enhanced in the long run.
8. Would you be willing to accept more risk if you expected to earn higher return? If so, which
attitude toward risk would you have?
Yes, I would because of the expectation for higher return. This means that I am a risk-
averse investor.
9. How do you understand the term ‘efficiency’ when applied to the financial markets?
Efficiency can be describes as the effective allocation of scarce resources among
competing (alternative) uses towards the production of goods and services.
10. Classify the following assets as real or financial: factory, stock, option, pencil, knowledge,
education.
Real, financial, financial, real, real, real.
2
Theories and Strategies, 2nd
Edition by Nikiforos T. Laopodis
Complete Chapter are included
(Ch 1 to 16)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
Chapter 1 The Investment Framework
Chapter 2 The Investment Decision Process and Investment Strategies
Chapter 3 Fundamentals of Risk and Return
Chapter 4 The Global Financial Environment
Chapter 5 Money and Capital Markets, Instruments and Strategies
Chapter 6 Investment Bankers and Investment Companies
Chapter 7 Diversification and Asset Allocation
Chapter 8 Efficient Diversification and Capital Market Theory
Chapter 9 Market Efficiency and Behavioral Finance
Chapter 10 Equity and Fundamental Analyses
Chapter 11 Equity Valuation and Investment Strategies
Chapter 12 Bond Fundamentals and Valuation
Chapter 13 Bond Portfolio Management and Performance Evaluation
Chapter 14 Option Markets and Valuation Models
Chapter 15 Futures Markets and Strategies
Chapter 16 Other Topics in Investments
, CHAPTER 1
The Investment Framework
1. As a potential investor, what would be your objective(s) and constraints? What major trade-
offs do you face?
The answer depends on the student. In general, all investors face quantitative and
qualitative constraints. For example, constraints include resources, age and preferences and
objectives include wealth maximization or satisfaction of some future liability. One tradeoff is
the balancing between risk and return since higher expected return entails assuming more risk.
2. Why is it inappropriate to say ‘I want to make as much money on my investments as possible’?
What are you ignoring?
Such talk is meaningless. You ignore the other side of the situation – risk. Remember,
that there is a trade off between risk and return and these cannot be separated.
3. Take a look at the cafeteria in your college campus. You and most of other students go there
on a daily basis for food and drinks. If the male person working there to serve you is always
shirking his work responsibilities, how would you advise him in order to keep his job?
The obvious answer would be to advise him to rise up to his responsibilities. By not
doing his part, other co-workers are filling in and thus costs, explicit and implicit, rise. For
example, other co-workers may not do his job efficiently and effectively resulting in waste of
time, and resources. In addition, customer wait may become a factor which also, indirectly, will
contribute to the cost of service and thus a higher price for you, the customer. As a result, you
should advise him to take seriously his responsibilities or simply find another job.
4. We discussed the conflicts that arise between a company’s manager and its stakeholders.
Can you suggest some other ways to align a manager’s goals to those of the firm’s owners?
You might want to scour The Wall Street Journal to find some relevant articles.
The answer is left to the student.
5. Consider the following scenario. Suppose your parents ask their neighbor (who consistently
pays attention to the stock market because he is an active investor) for advice on a particular
stock. Your parents wish to decide if it makes sense to buy the stock. If the neighbor’s opinion
on the stock is favorable and says that the company will do fine in the future, is such a statement
unethical? Answer the question assuming that your parents thought that your neighbor’s
opinion was based on a good knowledge of the company.
It depends. For example, if your neighbor had prior knowledge that the company is
about to go under and misled you into buying stock from that company, then it would most
1
, likely be unethical behavior. If not, then it would not matter. You should also question your
neighbor’s motives for suggesting such a purchase. What could possibly be his benefit from
doing so?
6. We discussed the conflicts that arise between existing and new stockholders when
management wishes to undertake new projects financed by equity. Now, consider the following
scenario. The management of the firm has no other means of financing a new risky project but
to sell bonds. If bondholders knew of the project’s riskiness (which might be greater that they
would be willing to bear), they would outright refuse to provide the funds. Explain the outcome
of such behavior by the bondholders. Do we have an instance of market failure? What if the
bondholders did not know of the project’s risk? What impact would that have on the
bondholders’ wealth (relative to that of the stockholders)?
Bondholders would pursue this action because they know that more debt lowers the
value of existing debt. Thus, creditors, old and new alike, will be put at risk. Moreover, if the
project is successful, the benefits would exclusively accrue to shareholders but not to
bondholders because they only get a fixed return. On the other hand, if the project goes sour,
then creditors might also share the loss. From the shareholders’ point of view, this situation is
‘heads I win, tails you lose’ game, which may not be viewed well by creditors.
The agent-principal conflict is relevant in this case. This conflict arises because the
stockholders know that if the project goes sour they will lose but the creditors will still be paid.
7. We discussed social responsibility in the text. Can you advance an argument for the
mandatory and for the non-voluntary requirement of such behavior for firms by government
law?
It will, in general, be difficult (if not politically possible) for the government to impose
mandatory restrictions on social responsibility actions of firms. Firms typically find it beneficial
to engage in socially desirable actions because their profitability is enhanced in the long run.
8. Would you be willing to accept more risk if you expected to earn higher return? If so, which
attitude toward risk would you have?
Yes, I would because of the expectation for higher return. This means that I am a risk-
averse investor.
9. How do you understand the term ‘efficiency’ when applied to the financial markets?
Efficiency can be describes as the effective allocation of scarce resources among
competing (alternative) uses towards the production of goods and services.
10. Classify the following assets as real or financial: factory, stock, option, pencil, knowledge,
education.
Real, financial, financial, real, real, real.
2
