The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

QUESTIONS

1. Following is information from General Mills’ fiscal 2011 first quarter results:

Earnings per share—basic	$0.73
Earnings per share—diluted	$0.70
Dividends per share	$0.28

a. What is the difference between the two earnings per share for General Mills for the period reported?

b. What is meant by the dividends per share?

c. Based on dilutive earnings per share, what is the dividend payout ratio?

2. What is the basic idea behind a dividend discount model?

3.

a. What is meant by a market order?

b. What risk is an investor exposed to when placing a market order?

c. When is a limit order executed?

4. The following appeared as the opening paragraph in an article appearing in the Wall Street Journal (March 31, 2010):

SHANGHAI—China will launch its long-awaited trial program for margin trading and short selling Wednesday, removing the last bit of uncertainty over its latest effort to introduce risky alternative-investment tools to its huge but still immature stock market.

a. What is meant by “margin trading” and why is it viewed as a risky strategy?

b. What is “short selling” and why is it viewed as a risk strategy?

5. What are the costs associated with short selling?

6. The following is the opening paragraph of a Bloomberg Businessweek story published on March 25, 2010 (http://www.businessweek.com/news/2010-03-25/fsa-probe-is-said-to-focus-on-front-running-of-block-trades.html):

March 26 (Bloomberg)—Britain’s financial regulator is examining whether some of the seven people ...