Deck 11: Common Stocks: Analysis and Strategy

Question 1

According to the general consensus of investment managers, what percentage of a typical investor's portfolio should be invested in international markets?

A) 5 to 10
B) 10 to 20
C) 20 to 30
D) 30 to 50

Answer 1

D

Question 2

A significant advantage of index funds is their:

A) lower market price than other types of funds.
B) superior sector rotation approach.
C) tax efficiency.
D) minimization of risk.

Answer 2

C

Question 3

When building a portfolio, what are the two basic components of an investor's investment decision?

A) Risk and return
B) Buying and selling
C) Cash flows and capital gains
D) Asset allocation and security selection

Answer 3

D

Question 4

For adequately diversified common stock portfolios, what percent of the variability in returns is accounted for by market effects?

A) 30
B) 50
C) 70
D) 90

Question 5

A bear market is characterized by a decline of:

A) 10% or more in the stock market.
B) 20% or more in the stock market.
C) 40% or more in the stock market.
D) 50% or more in the stock market.

Question 6

The required return for a common stock is defined as the:

A) expected return based on probabilities assigned to different scenarios.
B) maximum expected return based on estimates of its cash flows.
C) minimum expected return necessary to induce an investor to purchase the stock.
D) mean return for the stock over the past ten years.

Question 7

One of the most famous investment advisory services since 1965 is:

A) the Wall Street Journal.
B) Standard and Poor's Corporate Records.
C) Moody's.
D) the Value Line Investment Survey.

Question 8

A fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:

A) a value index fund.
B) a derivatives index fund.
C) an enhanced index fund.
D) an active index fund.

Question 9

Which of the following is the biggest factor explaining the variation in returns to individual stocks and stock portfolios?

A) Aggregate market movements
B) Beta
C) Standard deviation
D) Financial risk

Question 10

A passive investment strategy attempts to:

A) achieve returns available in various market sectors at minimum risk.
B) achieve maximum returns available in various market sectors.
C) achieve minimum risk in various market sectors.
D) achieve returns available in various market sectors at minimum cost.

Question 11

Which of the following statements concerning index funds and actively managed funds is true?

A) Their performance is about equal.
B) They tend to have an inverse relationship.
C) Actively managed funds tend to outperform index funds.
D) Index funds tend to outperform actively managed funds.

Question 12

Passive common stock strategies attempt to minimize:

A) capital losses.
B) transactions costs, including time spent managing the portfolio.
C) market risk.
D) company and industry risk.

Question 13

Which of the following models provides investors with a method of calculating a required return for a stock?

A) DuPont model
B) Risk premium model
C) Fisher model
D) Capital asset pricing model

Question 14

From 1989 to 2015, the Japanese stock market lost what percent of its value?

A) 20
B) 30
C) 40
D) 50

Question 15

If security markets are fully efficient, the best common stock strategy is:

A) a rotation strategy.
B) a buy low, sell high strategy.
C) an active strategy.
D) a passive strategy.

Question 16

If investors become more pessimistic about market conditions, what impact is anticipated for the required return on equities? The required return will:

A) decrease.
B) increase.
C) stay the same.
D) increase in the short-term but decrease in the long-term.

Question 17

The most important decision when building a diversified stock portfolio is:

A) individual security selection.
B) asset allocation.
C) minimization of risk.
D) maximization of expected return.

Question 18

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

A) There are no selection choices to be made under this strategy.
B) This strategy is applicable only to large portfolios.
C) There is no reinvestment decision to make under this strategy.
D) This strategy produces relatively low transactions and search costs.

Question 19

Which of the following is not considered a passive equity investment:

A) investing in a sector ETF.
B) investing in an S&P 500 index mutual fund.
C) investing in a multi-strategy hedge fund.
D) investing in a Russell 2000 index mutual fund.

Question 20

Investors following a passive strategy use which of the following as the best estimate of a security's value?

A) The value derived from the dividend discount model
B) The value derived from the Fisher model
C) The current market price
D) The estimated EPS multiplied by the appropriate P/E multiple

Question 21

Historically, sell-side equity research has tended to assign:

A) very unfavorable ratings to target companies.
B) unfavorable ratings to target companies.
C) favorable ratings to target companies.
D) neutral ratings to target companies.

Question 22

A general guideline is that investors should probably have at least 20 percent of their portfolio invested in emerging markets.

Question 23

Which of the following types of funds is especially popular with investors following a momentum strategy?

A) Sector funds
B) Managed funds
C) Global funds
D) Index

Question 24

Commodity ETF's are mainly used as speculative plays by:

A) hedge fund traders.
B) conservative investors.
C) mutual fund managers.
D) value investors.

Question 25

Which of the following is most accurate regarding the value premium?

A) It has been positive every year over the last 30 years.
B) It is derived as the return on a growth portfolio minus return on a value portfolio.
C) Its long-run average is negative.
D) It can be considered compensation for taking a contrarian approach.

Question 26

What evidence, gathered during the 1990s, about analysts was instrumental in motivating changes in market regulations?

A) They were paid too much.
B) They were unable to accurately pinpoint earnings.
C) They gave buy recommendations to win investment banking business.
D) They shared private information about companies with investors.

Question 27

What is usually considered the biggest risk of market timing?

A) Getting out of the market too soon
B) Generating high transactions costs
C) Failing to adjust for short-term corrections
D) Being out of the market at critical times

Question 28

The so-called "global settlement" negotiated by the SEC, NYSE, and NASD with a number of brokerage firms was intended to:

A) ensure more disclosure of relevant information to investors.
B) separate investment banking from analyst research.
C) stop the practice of buy, sell, or hold recommendations in analysts' reports.
D) stop the practice of trading on inside information.

Question 29

Market timers attempt to earn abnormal returns by:

A) adjusting the ratio of aggressive equity securities to defensive equity securities.
B) shifting the mix of short-term securities to long-term securities.
C) varying the percentage of portfolio assets in equity securities.
D) adjusting the ratio of money market securities to capital market securities.

Question 30

Sector rotation:

A) is a form of passive investing.
B) is an active strategy similar to stock selection.
C) varies the percentage of equities in the portfolio in order to earn abnormal returns.
D) is not dependent on an accurate assessment of current economic conditions.

Question 31

Which of the following statements regarding defensive stocks is true?

A) They are often expected to have above-average future growth.
B) They often have high P/E multiples.
C) They are expected to be adversely affected by high interest rates.
D) They often produce necessary items such as food and prescription drugs.

Question 32

What condition is supported if, after considering transactions costs, stock prices reflect their approximate fair value?

A) After-cost efficiency
B) Economic efficiency
C) Market equilibrium
D) Mean-variance efficiency

Question 33

Which of the following does not represent a requirement for conducting effective sector rotation?

A) Developing an accurate assessment of current economic conditions.
B) Having a knowledge and understanding of the phases of the business cycle.
C) Having an understanding of the political environment.
D) Having expertise in technical analysis.

Question 34

If security prices fully reflect all relevant available information, the security market is said to be:

A) rational.
B) in equilibrium.
C) effective.
D) efficient.

Question 35

The Coffeehouse Portfolio suggests investors hold:

A) 50% bonds, 50% equities (including the S&P 500, Large Cap Value, International, Small Cap, and Small Cap Value stocks).
B) 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs).
C) 60% bonds, 40% equities (in two index funds).
D) 40% bonds, 60% equities (in two index funds).

Question 36

Growth stocks generally have relatively:

A) low dividend yields and relatively high price multiples.
B) high dividend yields and relatively low price multiples.
C) low dividend yields and relatively low price multiples.
D) high dividend yields and relatively high price multiples.

Question 37

An analyst employed by a pension fund to identify stocks to be purchased is referred to as:

A) a sell-side analyst.
B) a buy-side analyst.
C) an institutional analyst.
D) a money manager.

Question 38

Which strategy involves shifting the weights of securities in a portfolio to take advantage of security groups expected to do relatively better than others?

A) Portfolio management
B) Technical analysis
C) Momentum strategy
D) Sector rotation

Question 39

Which of the following statements about analysts' earnings forecasts is correct? Analysts' long-term forecasts tend to be too:

A) high, whereas their near-term forecasts tend to be too low.
B) high, and their near-term forecasts also tend to be too high.
C) low, whereas their near-term forecasts tend to be too high.
D) low, and their near-term forecasts also tend to be too low.

Question 40

The central focus of a security analyst's job is to:

A) ascertain the accuracy of financial statements of selected companies.
B) find growth stocks.
C) forecast a specific company's return.
D) determine the market demand for a specific company's stock.

Question 41

The nominal risk-free rate is calculated by subtracting an expected inflation premium from the real risk-free rate.

Question 42

Buy-side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.

Question 43

The Coffeehouse Portfolio tends to outperform the market when market performance is particularly strong.

Question 44

Momentum investing takes advantage of persistency in long-term stock performance.

Question 45

Under new SEC rules adopted in 2002, price targets for stocks are to be shown.

Question 46

A utility stock is likely to have a beta lower than the overall market.

Question 47

Analysts short-term earnings forecasts tend to be too optimistic.

Question 48

Security analysts receive all of their information from the management of the company.

Question 49

Sector rotation would be very successful in a truly efficient market.

Question 50

One of the major benefits of employing a buy and hold strategy is the savings on trading costs.

Question 51

If security prices fully reflect all the relevant information that is available and usable, then the security market is considered to be efficient.

Question 52

Index funds are considered relatively tax efficient since they rarely have realized short-term gains.

Question 53

Market risk is the single most important risk affecting the price movements of common stocks.

Question 54

Mortgage REITs are generally considered to be interest rate sensitive.

Question 55

As evidence about the efficiency of stock markets has grown, so have index funds.

Question 56

Due to advances in technology and better understanding of stocks and financial markets, security analysts' estimates have become more accurate.

Question 57

Relative to growth stocks, value stocks generally have a lower beta.

Question 58

Historical evidence indicates that the greatest proportion of analyst recommendations are hold recommendations.

Question 59

A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.

Question 60

The primary emphasis in fundamental security analysis is on expected sales of the company.

Question 61

What are the four broad stock sectors? What is sector rotation? Explain what changes in the business cycle would prompt one to rotate from one sector to another.

Question 62

What tends to happen to the risk profile for an investor that follows a buy-and-hold strategy?

Question 63

With respect to proper diversification in asset allocation, what are the general guidelines for a U.S. investor's portfolio regarding foreign securities?

Question 64

Compare and contrast the passive strategies of buy-and-hold and buying index funds.

Question 65

An investment fund describes itself as a value fund. What characteristics would you expect the fund to exhibit?

Question 66

What is meant by the term "defensive stocks?" Give some examples.

Question 67

An investor using the buy-and-hold strategy will receive dividends to reinvest. What dividend option do many companies offer that would make this strategy even more passive?

Question 68

In an upward trending market, what sectors might investors over weight to increase absolute returns?

Question 69

How is the required return utilized in stock analysis?

Question 70

How could one invest indirectly in sectors and practice sector rotation?

Question 71

What is the paradox regarding fundamental analysis in regard to the efficient market hypothesis (EMH)?

Question 72

Accoring to Burton Malkiel, what are the major reasons investing in index funds works?