The Global Market and Securities Markets: Operations & Organization

Tutorial

1. Discuss any factors that cause local fund managers to consider adding various
global securities to their clients’ portfolios.

2. Discuss why international diversification reduces portfolio risk. Specifically, why

would you expect low correlation in the rates of return for domestic and foreign
securities?

3. Some investors believe that international investing introduces additional risks.

Discuss these risks and how they can affect your return. Give an example.

4. Compare the liquidity of an investment in raw land with that of an investment in

common stock. Be specific as to why and how the liquidity differs. (Hint: Begin
by defining liquidity.)

5. Debswana Pension Fund has historically invested in the stocks of only Botswana-
domiciled companies. Recently, the Fund has decided to add international
exposure to the fund’s portfolio.
Identify and briefly discuss potential problems that the Fund may confront in
selecting international stocks that it did not face in choosing Botswana stocks.

6. You own 200 shares of Shashe Limited stock and you want to sell it because you
need the money to make a down payment on a car. Assume there is absolutely
no secondary market system for the common stock. How would you go about
selling the stock? Discuss what you would have to do to find a buyer, how long it
might take, and the price you might receive.
7. Define a primary and secondary market for securities and discuss how they
differ. Discuss how the primary market is dependent on the secondary market.
8. Give an example of an initial public offering (IPO) in the primary market. Give an
example of a seasoned equity issue in the primary market. Discuss which would
involve greater risk to the buyer.

9. Briefly explain the difference between a competitive-bid underwriting and a

negotiated underwriting.

10. Briefly define each of the following terms and give an example.
a) Market order
b) Limit order
c) Short sale
d) Stop loss order

11. Suppose you buy 500 shares of Barclays Botswana Limited on 55 percent margin
when the stock is selling at P15 a share. The broker charges a 5 percent annual
interest rate, and commissions are 2 percent of the stock value on the purchase
and sale. A year later you receive a P0.20 per share dividend and sell the stock
for P25 a share.

What is your rate of return on Barclays Botswana Limited?

12. Three years ago, you bought 400 shares of Turnstar Limited for P24 a share with
a margin of 55 percent. Currently, the Turnstar stock is selling for P44 a share.
Assuming no dividends and ignoring commissions, compute:
a) The annualized rate of return on this investment if you had paid cash, and
b) Your rate of return with the margin purchase.
13. The stock of Sefalana Holdings Limited is selling for P27 a share. You put in a
limit buy order at P23 for a fortnight. During the fortnight the stock price
declines to P20, then jumps to P36.
a) Ignoring commissions, what would have been your rate of return on this
investment?
b) What would be your rate of return if you had put in a market order?
c) What if your limit order was at P19?

14. You own 200 shares of Letshego Limited that you bought at P25 a share. The
stock is now selling for P45 a share.
a) You put in a stop loss order at P40. Discuss your reasoning for this action.
b) If the stock eventually declines in price to P30 a share, what would be
your rate of return with and without the stop loss order?

15. You decide to sell short 300 shares of Choppies Enterprises when it is selling at
its yearly high of P56. Your broker tells you that your margin requirement is 40
percent and that the commission on the purchase is P155. While you are short
the stock, Choppies pays a P1.50 per share dividend. At the end of one year, you
buy 300 shares of Choppies at P42 to close out your position and charged a
commission of P120.
What is your rate of return on the investment?