Question 1

The neglected firm effect refers to an empirical observation that firms followed by relatively few ______ have had abnormally high returns.

Accepted Answer

The neglected firm effect refers to the phenomenon where firms that are followed by relatively few security analysts tend to have abnormally high returns. It suggests that these firms are undervalued and therefore present investment opportunities for investors who do their own research and analysis. Contrarians, chartists, and hedgers/speculators are not directly related to this effect.

Question 2

A fundamental analyst would recommend to buy a stock if its intrinsic value were

Accepted Answer

A fundamental analyst believes that the intrinsic value of a stock represents its true value, which is determined by analyzing the company's financial and economic factors. Therefore, if the intrinsic value is greater than the market value, it means that the stock is undervalued and has the potential for a higher price in the future. Hence, a fundamental analyst would recommend buying the stock in this scenario.

Question 3

The certification that relates to a professional financial analyst is the:

Accepted Answer

The certification that relates to a professional financial analyst is the Chartered Financial Analyst (CFA). This certification is globally recognized and highly respected by employers and clients in the finance industry. It requires passing a rigorous series of exams and meeting specific work experience requirements.

B) CLU (Chartered Life Underwriter) is a certification for professionals in the insurance industry who specialize in life insurance and estate planning. 
C) CHA (Certified Hotel Administrator) is a certification for professionals in the hospitality industry. 
D) CPA (Certified Public Accountant) is a certification for professionals in the accounting industry. While some financial analysts may also hold a CPA, it is not the certification specific to financial analysis.

Question 4

A passive investment system

Accepted Answer

A passive investment system involves buying and holding a diversified portfolio, with the goal of matching the performance of a market index. It does not require constant financial analysis or selling based on bond yields or intrinsic value.

Question 5

_____ analysis attempts to predict short-term price movements and makes recommendations concerning the timing of purchases and sales of stocks.

Accepted Answer

Technical analysis focuses on chart patterns, historical price and volume data, and other market indicators to identify trends and potential price movements in the short term. This information is then used to make recommendations on when to buy or sell stocks. Fundamental analysis, on the other hand, looks at a company's financial and economic fundamentals to determine its intrinsic value and potential long-term performance. Bottom-up and top-down analyses are broader approaches that consider macroeconomic factors and industry trends when making investment decisions.

Question 6

CFA's

Accepted Answer

CFA candidates must pass three exams, each of which is six hours long. The exams typically take multiple years to complete, with candidates often studying and testing while working full-time in the finance industry. The other answer choices are incorrect as CFAs can live and work in any country, it takes several years to achieve this designation, and there is no requirement for a certain number of seminar hours for maintaining the license.

Question 7

___ analysis forecasts future levels of gross domestic product, sales and earnings of industries, and future returns of specific stocks.

Accepted Answer

Fundamental analysis involves examining the underlying economic and financial factors that influence the value of a security, such as the health of the overall economy, industry trends, and company financials. This analysis can help predict future levels of GDP, industry sales and earnings, and the returns of specific stocks. Technical analysis (A) looks at past market data to identify trends and patterns, while probabilistic analysis (B) uses statistical models to calculate the probability of future events. Microeconomic analysis (C) examines the behavior and decision-making of individual consumers and firms in specific markets.

Question 8

The basic strategy of the contrary opinion is to determine the consensus opinion and then do the

Accepted Answer

The basic strategy of the contrary opinion is to go against the consensus opinion in the market. Hence, the answer is (A) opposite.

Question 9

A technical analyst who relies primarily on stock price and volume graphs when evaluating securities is called a(n)

Accepted Answer

A technical analyst who relies primarily on stock price and volume graphs is called a chartist. They use charts and graphs to identify patterns and trends in market behavior to make trading decisions.

Question 10

Concerning insider trading, the narrow definition of an insider would include all of the following EXCEPT the __ access to unavailable information

Accepted Answer

The definition of an insider includes individuals who have access to non-public information related to a company, such as corporate stockholders, directors, and chief executive officers. Therefore, choice A, which states a person who does not have access to this information, would not be considered an insider.

Question 11

___ model is a statistical model that provides a means of forecasting the levels of certain variables, known as ___ variables.

Accepted Answer

Econometric models are statistical models used in econometrics that forecast levels of endogenous variables, which are influenced by other variables in the model.

Question 12

Returns from momentum, contrarian, and trading range breakout strategies all involve

Accepted Answer

Momentum, contrarian, and trading range breakout strategies are all based on technical analysis and the use of trading rules rather than fundamental analysis. Geometric averages and winner portfolios may be relevant to investment strategies, but they are not specifically related to these trading methodologies.

Question 13

In 1962 the Institute of Chartered Financial Analysts was formed to award the professional designation of

Accepted Answer

The Institute of Chartered Financial Analysts was formed in 1962 to award the professional designation of chartered financial analyst.

Question 14

Financial analysis attempts to identify certain characteristics of securities as well as

Accepted Answer

Mispriced securities are securities that are not priced correctly in the market. Financial analysis can help to identify mispriced securities by comparing their prices to their intrinsic value.

Question 15

The most frequent approach used by financial analysts is

Accepted Answer

Fundamental analysis is the most frequently used approach by financial analysts. This method involves analyzing financial and economic data to evaluate the intrinsic value of an asset. It includes reviewing financial statements, economic indicators, company news, and industry trends to assess the future performance of a stock or other investment. Technical analysis and chartist approach, on the other hand, rely on past market data and patterns to predict future market movements. Random walk theory suggests that stock prices move randomly and cannot be predicted through analysis.

Question 16

The Dow Jones Industrial Average is calculated using

Accepted Answer

The Dow Jones Industrial Average is calculated using price weighting, which means the index is determined by the price of each component stock, rather than the total market value. As such, stocks with higher prices have a greater impact on the index, regardless of their market capitalization.

Question 17

The index using the most number of stocks is

Accepted Answer

The Wilshire 5000 is the broadest market index, including over 5000 US equities, giving it the most diverse representation of the overall market compared to other indexes like the S&P 500, which only includes 500 companies. Therefore, option C is the best choice.

Question 18

The approach that first creates forecasts for the economy, then for industries, and finally for companies is known as the _____ approach

Accepted Answer

The top-down approach starts with an analysis of the overall economy and then uses this information to make forecasts for different industries and companies.

Question 19

Standard and Poor's _______ are a major source for the financial history of individual companies.

Accepted Answer

Corporation Records are a major source for the financial history of individual companies.

Question 20

The measure of market performance most used by professional money managers is

Accepted Answer

The Standard and Poor's 500 (S&P 500) is the most commonly used measure of market performance by professional money managers. It is a market-capitalization weighted index of 500 large companies listed on the New York Stock Exchange or NASDAQ. The index is considered a good barometer of the overall health of the U.S. stock market and is widely used as a benchmark for investment performance.

Quiz 14: Financial Analysis of Common Stocks