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Forecasting stock prices

1. Explain how puts and calls can be used to reduce reisk, speculate, and increase portfolio returns.

3. List a minimum of four fundamental factors to be considered when trying to forecast stock prices.

4. List two advantages of buying a put on a stock instead of selling it (the stock) short.

5. If you expect interest rates to decrease, what would you be likely to do if you held primarily cash and common stock in your portfolio? Why?

6. Jane invests $20,000, and five years later has accumulated $32,210. At the same time, her friend Joe invests $20,000 but withdraws $2,000 per year over the same five-year period (those withdrawals are made at the end of each year). Each has been bragging that they earned a 10% return on their investment. Explain how this can be true, given that Jane earned $12,210 in interest compared to Joe's $10,000.

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Please give details for the following questions.

1. Explain how puts and calls can be used to:
reduce risk - buying the right to purchase a stock (call option) at a certain price can protect against losses in a long position; if the stock drops below that price, you can exercise the option
increase portfolio yields (returns) - covered calls can increase returns; you get the price of call as well as any increase in your stock (up to the strike price)
speculate - selling a naked put means that you agree to buy a stock at a price lower than its current price. If the stock stays high, you keep the premium without having to buy any stock.

3. List a minimum of four fundamental factors to be considered when trying to ...

Solution Summary

Using calls and puts; the business cycle and investing; forecasting stock prices.

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