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Various Investment Concepts

8-1: Does a balance sheet that is dated year-end 2004 reflect only transactions for that year?

8-7: In computing return on assets, how does the age of the assets influence the interpretation of the values?

21-5: What does the correlation coefficient measure? What are the two most extreme values it can take, and what do they indicate? In the real world, are more variables positively or negatively correlated?

21-10: In examining the capital market line as part of the capital asset pricing model, to increase portfolio return (KP) what other variable must you increase?

22-5f: What is the Sharpe approach to measuring portfolio risk? If a portfolio has a higher Sharpe measure than the market in general under the Sharpe approach, what is the implication?

22-8f: Explain alpha as a measure of performance.

22-10f: If investment companies do not offer returns that are, on average, any better than the market in general, why would someone invest in them?

Solution Preview

8-1: Because a balance sheet presents a snapshot of a company's financial condition (i.e., its assets, liabilities and owners' equity) at a point in time, and every transaction from the time the entity originates to any point in time affects its financial condition, the balance sheet at the end of 2004 will reflect every transaction from the origination of the entity to the date of the balance sheet.

8-7: Return on Assets (ROA) is supposed to indicate how efficiently the entity is employing its assets to earn net income. However, if the assets are getting older and their ability to earn revenues will be impaired, the ROA must be adjusted to reflect the fact that future returns may be lower either because the ...

Solution Summary

This solution discusses the correlation coefficient, the Capital Asset Pricing Model, the Sharpe Ratio, and the Alpha coefficient.