Deck 14: Common Stocks: Analysis and Strategy

Question 1

The single most important risk affecting fluctuations in individual stock prices and portfolios of stocks is:

A) unsystematic risk.
B) foreign exchange risk.
C) market risk.
D) firm specific risk.

Answer 1

market risk.

Question 2

Which model provides investors with a method of calculating the minimum expected return necessary for an investor to purchase the stock?

A) the nominal risk-free rate
B) the real risk-free rate
C) the Fisher model
D) the Capital Asset Pricing Model (CAPM).

Answer 2

the Capital Asset Pricing Model (CAPM).

Question 3

The nominal risk-free rate is the:

A) real risk-free rate plus a risk premium.
B) real risk-free rate plus an inflation premium.
C) real risk-free rate plus an interest rate premium.
D) real risk-free rate less an inflation premium.

Answer 3

real risk-free rate plus an inflation premium.

Question 4

Risk premiums that are greater than the riskless rate of return are anticipated to compensate investors for:

A) the anticipated rate of inflation.
B) overall market risk.
C) the business and financial risk of the corporation.
D) the potential loss in purchasing power.

Question 5

A stock with a defensive beta, lower than 1, has a required return that is:

A) less than the risk-free rate.
B) between the risk-free rate and the market return.
C) equal to the market return.
D) greater than the market return.

Question 6

Passive common stock strategies attempt to do all of the following except:

A) outperform the market.
B) minimize transaction costs.
C) minimize time spent in managing the portfolio..
D) invest in indexed portfolios.

Question 7

Which of the following statements regarding a buy-and-hold strategy is true?

A) Passive investors do not care about what index portfolio to use as they all produce the same returns over time.
B) This strategy is followed only by investors with small portfolios.
C) There is no reinvestment decisions to make under this strategy as all income is simply spent.
D) This strategy produces lower transaction and search costs than active strategies.

Question 8

The most widely traded Canadian ETF is:

A) the Spider.
B) the i60.
C) the Cubes.
D) the Holders.

Question 9

Which of the following strategies is available to individual investors that are not available to institutional investors?

A) Individuals are not required to own diversified portfolios.
B) Individuals are not prohibited from short sales or margin trading, as are some institutions.
C) Many large institutional investors cannot take positions in very small companies leaving this field for individual investors.
D) All the above strategies are open to individual investors.

Question 10

Which of the following is not a reason why indexing works?

A) Funds incur heavy trading expenses.
B) Securities markets are generally inefficient.
C) Indexing is cost efficient.
D) Indexing has tax advantage.

Question 11

The world's largest investment advisory service in terms of numbers of subscribers is:

A) Bloomberg.
B) Standard and Poor's Corporate Records.
C) Moody's.
D) Value Line Investment Survey.

Question 12

Institutional investors that have their own analysts are referred to as:

A) technical analysts.
B) sell-side analysts.
C) buy-side analysts.
D) investment advisors.

Question 13

Which of the following is not one of the variables of major importance to security analysts?

A) the company's expected ROE
B) the investor's expected ROI
C) expected changes in the company's EPS
D) the outlook for the company's industry

Question 14

Analysts consistently emphasize:

A) safer over riskier.
B) stocks over bonds.
C) capital gains over current income.
D) long-term over short-term.

Question 15

Which of the following statements about the required rate of return is false? The required rate of return is:

A) also known as the discount rate.
B) the sum of the risk-free rate and the market's rate of return.
C) the minimum return expected relative to the risk of a security.
D) the sum of the risk-free rate of return and the risk premium.

Question 16

Which of the following is true regarding the risk premium? The risk premium:

A) reflects all the uncertainty involved with the stock.
B) applies only to high beta stocks.
C) is not related to changes in the interest rate.
D) reflects only the business risk of a security.

Question 17

According to the CAPM, the relationship between the systematic risk of the asset and the required rate of return is assumed to be:

A) nonlinear and upward sloping.
B) nonlinear and downward sloping.
C) linear and upward sloping
D) linear and upward sloping.

Question 18

The top-down approach to fundamental analysis considers all the following except:

A) industry analysis.
B) technical analysis.
C) economic analysis.
D) company analysis.

Question 19

__________ shifts the weights of securities in the portfolio to take advantage of industries that are expected to do relatively better than other industries during different phases of the business and credit cycles.

A) Active portfolio management
B) Market timing
C) Momentum investing
D) Sector rotation

Question 20

Which of the following statements about technical analysis is false? Technical analysis:

A) analyzes data for the purpose of identifying recurring patterns.
B) examines the basic question of whether excess supply or demand exists for a stock.
C) must be used in conjunction with fundamental analysis when valuing stocks.
D) uses graphical charting of price changes and volume over time.

Question 21

Fundamental analysts assume that the market price and intrinsic value of a stock:

A) are always in equilibrium.
B) can differ from time to time.
C) do not bear any discernable relationship to each other.
D) are strongly related to the par value of the underlying security.

Question 22

The equity risk premium for the market is 8 per cent. Wilson Products has a beta of 0.4. The real risk-free rate is 2 per cent and the expected inflation premium is 5 per cent. What is the required rate of return from Wilson?

A) 15.4
B) 10.2
C) 7.4
D) 6.7

Question 23

All of the following represent requirements for conducting effective sector rotation, except

A) an accurate assessment of current economic conditions.
B) a knowledge and understanding of the phases of the business cycle.
C) an understanding of the political environment.
D) examining technical patterns in the underlying stocks.

Question 24

Which of the following statements is not an example of a defensive stock?

A) food producers
B) breweries
C) pharmaceuticals
D) gold mining

Question 25

The choice between following an active or a passive investment strategy generally depends on all of the following factors, except the:

A) amount of investment involved.
B) investor's expertise.
C) investor's belief in market efficiency.
D) availability of time.

Question 26

The recommended framework for fundamental analysis:

A) puts more emphasis on finding value stocks than growth stocks.
B) is a market-timing strategy.
C) starts with analysis of the economy/market first, before moving onto the industry, and finally, company analysis.
D) uses extensively the concept of market efficiency in making asset selection decisions.

Question 27

Which of the following variables is estimated by most security analysts:

A) market-to-book ratio.
B) future earnings per share.
C) current ratio.
D) fixed asset turnover.

Question 28

Which of the following is not one of the four broad sectors of stocks?

A) Interest sensitive
B) Consumer durable
C) Capital goods
D) Environmental protection

Question 29

Fundamental analysis involves analysis of past movements in securities prices to identify recurring price patterns.

Question 30

The efficient market hypothesis supports both fundamental and technical analysis.

Question 31

Technical analysis is most concerned with determining why there is excess demand for a security.

Question 32

Analysis of the industry and market is the second step in the top-down approach to stock analysis.

Question 33

Financial statements are used extensively by technical analysts.

Question 34

Value stocks feature underpriced assets and strong financial statements.

Question 35

The three steps in building stock portfolios are (a) asset allocation, (b) security selection, and (c) market timing.

Question 36

The relationship between risk and the required rate of return is considered to be linear.

Question 37

Security analysts typically receive the bulk of their information from subscription services.

Question 38

Sector rotation would be unsuccessful in a highly efficient market.

Question 39

In fundamental analysis most investors use either a present value or a P/E model.

Question 40

What are the two steps to building a stock portfolio?

Question 41

If stock selection is of paramount importance, why is security analysis placed last in the top-down approach to fundamental analysis?

Question 42

How could fund managers (and individual investors) use beta in market timing?

Question 43

Briefly explain bottom-up and top-down fundamental analysis.

Question 44

Discuss the overall fundamental analysis approach to stock analysis.