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Risk and Return Differences, NYSE and NASDAQ, Futures Contract

1. History has demonstrated that there is a relationship between risk and return. History has also demonstrated that small cap stocks have outperformed large cap stocks by a significant amount. Given this evidence, please explain why investors still purchase large cap stocks.

2. You are having a conversation with your finance professor after class discussing investments. Your professor tells you that he short sold 100 shares of TSG stock and went long on 200 shares of GHP stock this afternoon. He also tells you that he initiated both positions using a margin account with his broker. Based on this conversation what could you conclude about your professorâ??s investment approach and his outlook on TSG and GHP stock?

3. A famous economist just announced in the WSJ his findings that the recession is over and the economy is again entering an expansion. According to the efficient market hypothesis, could you profit investing in the stock market after you read this announcement?

4. Farmer Brown grows corn. He expects his crop to be 520,000 bushels this fall. However when he planted the crop, he sold futures contracts on only 360,000 bushels of corn. Explain why farmer Brown would want to sell his crop using futures? Explain why he did not sell the entire expected crop using futures?

5. Compare and Contrast the NYSE and the NASDAQ exchanges.

6. What is behavioral finance and how does investor behavior affect the markets according to those who support behavioral finance? Use one method discussed in either text as an example

7. Compare and contrast real rates with inflation rates. Be sure to include what rate you are more interested in from an investorâ??s point of view and why.

8A. Famous economist just announced in the WSJ his findings that the recession is over and the economy is again entering an expansion. According to the efficient market hypothesis, could you profit investing in the stock market after you read this announcement?

Solution Preview

1. Investors still purchasing large cap stocks such as blue chips stocks because those stocks have the ability and reliability to survive in a good time and in a hard time, it's very low possibility that these stocks are going to go bankrupt.

2. My professor believes that TSG stock price is going down, and GHP stock price is going up. He is using the margin account because he does not have enough cash to do this transaction, so he's using margin leverage. He could borrow money up to 50% of total transaction. So he can afford ...

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