Question 1

Technical analysts probably would agree that fundamental analysts can find the intrinsic value of a firm, but, by the time fundamentalists finish their analysis, it is too late to take advantage of the result.

Accepted Answer

Technical analysts believe that the best way to profit is to identify trends and patterns in the market rather than analyzing a company's intrinsic value, which takes too much time and is often seen as too subjective to accurately calculate. Therefore, they may believe that by the time fundamental analysts finish their analysis, the market has already priced in the information and it is too late to make a profitable trade based on the analysis.

Question 2

If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as cyclical.

Accepted Answer

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Question 3

If security markets were truly strong-form efficient, then there would be no need for investors to evaluate the value of stocks because they could never earn abnormal returns.

Accepted Answer

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Question 4

A mispriced stock exists when the market value and intrinsic value are not the same.

Accepted Answer

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Question 5

Technical analysts essentially believe "history repeats itself" because investors behave in a predictable manner when faced with situations they have faced in the past.

Accepted Answer

Technical analysts use chart patterns and other technical indicators to identify trend reversals and potential price movements based on history and investor behavior in similar past situations.

Question 6

Using the dividend discount model (DDM) to value common stock is relatively easy because it entails simply computing the present value of the future cash flows, or dividends, generated by the firm.

Accepted Answer

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Question 7

The value of any asset can be described as the present value of the cash expected to be generated by the asset during its life.

Accepted Answer

This is the basic concept of asset valuation. The value of an asset is based on the cash flows it is expected to generate in the future, discounted to their present value.

Question 8

If the financial markets are strong-form efficient, then stock analysis would be a waste of time because investors would not be able to earn abnormal returns, no matter how well the valuation models they use perform.

Accepted Answer

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Question 9

Investments professionals agree that individuals should be disciplined with their investment strategy.Their advice would be: "don't change approaches just because results aren't immediate."

Accepted Answer

Investment professionals generally advise against making frequent changes to investment strategy and stress the importance of sticking to a disciplined approach, even if results are not immediate. This is because investing is a long-term game and sometimes it takes time for investments to mature and yield returns.

Question 10

The economic value added (EVA) valuation method might be the most attractive valuation method because it does not require estimation of unknown factors and it ties the value creation process to changes in a firm's capital structure and changes in a firm's efficiency.

Accepted Answer

The economic value added (EVA) method calculates a company's true economic profit by subtracting its cost of capital from its net operating profit after taxes (NOPAT). This method does not require estimation of unknown factors and it does incorporate a company's capital structure and efficiency, making it an attractive valuation method.

Question 11

The dividend discount model (DDM) cannot be used to value the stock of a company that has never paid a dividend and does not expect to pay a dividend in the near term.

Accepted Answer

The dividend discount model (DDM) can be adapted to value a company that does not currently pay dividends by making assumptions about the company's ability to generate and pay dividends in the future or by using a variant of the model that focuses on free cash flow to the firm or equity.

Question 12

If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as countercyclical, or defensive.

Accepted Answer

The answer of If an investor wishes to better diversify...

Question 13

Investors who search for "value" stocks are trying to find stocks that are mispriced in the markets.

Accepted Answer

This is true. Value investors look for stocks that are undervalued by the market or have a lower price compared to their fundamentals, making them a potentially good investment opportunity.

Question 14

The basic concept behind the economic value added (EVA) valuation method is that the firm's value is dependent on how well it can cover the costs of its existing capital.

Accepted Answer

The statement accurately reflects the basic concept of the EVA valuation method.

Question 15

If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return.

Accepted Answer

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Question 16

Market breadth indicators used by technical analysts provide a good indication of the "mood," or psychology, of the market.

Accepted Answer

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Question 17

The monetary policy of the United States relates to changes in the money supply, which are affected primarily by the ability of the U.S.Treasury to print and distribute currency.

Accepted Answer

The monetary policy of the United States is actually set by the Federal Reserve, which influences the money supply through various tools such as adjusting interest rates and buying/selling government securities. The U.S. Treasury is responsible for minting coins and printing paper money, but it does not have direct control over the money supply.

Question 18

Investment professionals probably would recommend that an investor who likes to gamble should have a portfolio that includes only speculative securities such as options and futures, interest-rate swaps, and so forth.

Accepted Answer

Investment professionals would not recommend that an investor's portfolio only includes speculative securities as this would be too risky and potentially lead to significant losses. They would typically recommend a balanced portfolio that includes a mix of both speculative and less risky securities.

Question 19

Most investors would be wise to purchase the common stock of companies that are in the introductory stage of their industry life cycle because it is in this stage that firms offer high, safe returns to investors.

Accepted Answer

The introductory stage of the industry life cycle is characterized by high uncertainty, high risk, and high potential returns, but these returns are not necessarily safe. Therefore, the statement is false. It is important for investors to conduct thorough research and analysis before investing in any company, regardless of its stage in the industry life cycle.

Question 20

Methods (models) used by technical analysts are designed to identify short-term, temporary market movements that investors can use to earn abnormal returns.

Accepted Answer

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Quiz 17: Security Valuation and Selection