Question 1

Markets can only be efficient if many competent analysts are performing fundamental analysis.

Accepted Answer

True

Question 2

Firms tend to be more profitable and have higher stock values when the economy is strong.

Accepted Answer

When the economy is strong, there is increased demand, production levels increase, and there is higher consumer confidence, all of which can lead to increased profits and higher stock values for firms.

Question 3

Developing a general economic outlook assists in the identification of industries and firms that might be good investment opportunities.

Accepted Answer

A general economic outlook can provide insights into which industries and firms will likely perform well, allowing for better investment decisions.

Question 4

The business cycle reflects economic changes only in the industrial sectors of the economy.

Accepted Answer

The business cycle reflects economic changes across all sectors of the economy, including industrial, agricultural, and service sectors. It is a measure of the overall health of the economy.

Question 5

Investors who believe that most securities are efficiently priced should not not be concerned with fundamental analysis.

Accepted Answer

The answer of Investors who believe that most securities are...

Question 6

An investor should buy a stock only if the prevailing market price exceeds the intrinsic value of the stock.

Accepted Answer

An investor should buy a stock only if the prevailing market price is less than the intrinsic value of the stock. This is because buying a stock below its intrinsic value provides a margin of safety and can lead to potential long-term gains. Buying a stock when the market price is above the intrinsic value may not be a wise investment decision.

Question 7

Top-down security analysis
A) starts with the fundamental analysis of a firm.
B) includes economic, industry, and fundamental analysis.
C) concentrates on the competency of the senior management of a firm.
D) centers on the past performance of a firm.

Accepted Answer

Top-down security analysis includes economic, industry, and fundamental analysis to identify the most promising sectors to invest in. It looks at macro factors that affect the industry and then zooms in to the individual firms that may benefit from these trends.

Question 8

Top-down security analysis begins with
A) an analysis of a company's top management.
B) determining an investment's risk and an appropriate discount rate.
C) an analysis of broad economic factors affecting the financial markets.
D) identifying specific industries that are likely to grow faster than the overall economy.

Accepted Answer

Top-down security analysis starts with examining broad economic factors to understand the overall market environment before narrowing down to specific industries and companies.

Question 9

The security analysis process should help investors to
I. purchase investments that are priced at or above their intrinsic value.
II. sell investments that are priced at or above their intrinsic value.
III. purchase investments that are priced at or below their intrinsic value.
IV. identify investments appropriate for their goals.
A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only

Accepted Answer

Investors should sell investments priced at or above intrinsic value (II), purchase those priced at or below intrinsic value (III), and identify investments that align with their goals (IV).

Question 10

An investment should offer an expected return commensurate with the risk involved.

Accepted Answer

This is a basic principle of investing. Higher risk investments should offer higher expected returns, while lower risk investments should have lower expected returns.

Question 11

Advocates of the efficient market hypothesis would argue that it is virtually impossible for any investor to consistently outperform the market.

Accepted Answer

The efficient market hypothesis suggests that all available information about a company or security is already reflected in the current market price, making it difficult for any investor to consistently outperform the market.

Question 12

The best time to buy stock is at the peak of an economic cycle.

Accepted Answer

The best time to buy stock is not at the peak of an economic cycle. It is generally recommended to buy stocks when the market is down or when there is a dip in the stock price, as this presents a buying opportunity at a potentially lower price. Buying at the peak of a cycle may mean buying at a higher price, which could lead to lower returns or losses in the future.

Question 13

Fundamental analysis involves the in-depth study of the
A) role of nondiversifiable risk in an investor's portfolio.
B) financial condition and operating results of a given firm.
C) pattern of security prices as revealed in chart formations.
D) role of diversifiable risk in an investor's portfolio.

Accepted Answer

Fundamental analysis involves analyzing a company's financial condition and operating results, including its financial statements, management, industry trends, and other economic factors that may affect the company's future performance. The other options (A, C, and D) do not relate to fundamental analysis.

Question 14

The purpose of economic analysis is to gain an insight into the underlying health or vitality of the economy and to formulate expectations about future security prices.

Accepted Answer

Economic analysis is used to understand the overall health, trends, and potential future developments of an economy. This information can be used to make predictions and inform investment decisions, including the valuation of securities such as stocks and bonds.

Question 15

The intrinsic value of a security is based on the
I. amount of risk.
II. current market value of the security.
III. discount rate applicable to the security.
IV. estimated future cash flows from the security.
A) I and III only
B) III and IV only
C) I, II and III only
D) I, III and IV only

Accepted Answer

The intrinsic value of a security is based on the amount of risk (I), discount rate applicable to the security (III), and estimated future cash flows from the security (IV). The current market value of the security (II) is not necessarily indicative of its intrinsic value, as the market can be influenced by various external factors that may not reflect the actual value of the security.

Question 16

Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of
A) fundamental analysis.
B) behavioral analysis.
C) the efficient market hypothesis.
D) technical analysis.

Accepted Answer

Investment analysts who believe in investigating the intrinsic factors of a company to find stocks that are undervalued or overvalued are advocates of fundamental analysis. Option B is incorrect as it refers to a different type of analysis that focuses on understanding the behavior of investors. Option C is incorrect as the efficient market hypothesis suggests that all information is already reflected in the stock prices, leaving no room for undervalued or overvalued stocks. Option D is incorrect as technical analysis relies on past stock performance patterns rather than intrinsic factors.

Question 17

The three steps in determining a stock's intrinsic value are
I. estimating the stock's future cash flows.
II. estimating the risk associated with future cash flows.
III. careful analysis of patterns in the stock's recent price history.
IV. estimating an appropriate discount rate to apply to future cash flows.
A) III and IV only
B) I, II and IV only
C) I, III and IV only

Accepted Answer

The three steps in determining a stock's intrinsic value are estimating the stock's future cash flows, estimating the risk associated with future cash flows, and estimating an appropriate discount rate to apply to future cash flows.

Question 18

One of the basic premises of security analysis, and in particular fundamental analysis, is that
A) a stock's price is based on its past cash flows rather than on anticipated future cash flows.
B) market sectors do not move in concert with business cycles.
C) all securities have an intrinsic value that their market value will approach over time.
D) a security's risk has relatively little effect on the security's return.

Accepted Answer

Fundamental analysis is based on the belief that all securities have an intrinsic value that their market value will approach over time. This approach involves analyzing a company's financials and industry trends to determine the underlying value of a security, rather than looking solely at its current market price. This intrinsic value is based on anticipated future cash flows, making choice A incorrect. Market sectors can indeed move in concert with business cycles, making choice B incorrect. While a security's risk can affect its return, this is not the primary focus of fundamental analysis, making choice D incorrect.

Question 19

Fundamental analysis can only be profitable if some securities are at least temporarily mispriced.

Accepted Answer

Fundamental analysis involves examining a company's financial and economic factors to determine its underlying value. It assumes that the market may not always correctly price a security, providing opportunities for investors to profit from the mispricing. However, if all securities were always correctly priced, fundamental analysis would not be profitable.

Question 20

Federal budget deficits tend to further depress an already depressed economy.

Accepted Answer

Federal budget deficits, through increased government spending or tax cuts, can actually stimulate a depressed economy by boosting demand, creating jobs, and increasing economic activity.

Quiz 7: Analyzing Common Stocks

Markets can only be efficient if many competent analysts are performing fundamental analysis.

Firms tend to be more profitable and have higher stock values when the economy is strong.

Developing a general economic outlook assists in the identification of industries and firms that might be good investment opportunities.

The business cycle reflects economic changes only in the industrial sectors of the economy.

Investors who believe that most securities are efficiently priced should not not be concerned with fundamental analysis.

An investor should buy a stock only if the prevailing market price exceeds the intrinsic value of the stock.

Top-down security analysis

Top-down security analysis begins with

An investment should offer an expected return commensurate with the risk involved.

Advocates of the efficient market hypothesis would argue that it is virtually impossible for any investor to consistently outperform the market.

The best time to buy stock is at the peak of an economic cycle.

Fundamental analysis involves the in-depth study of the

The purpose of economic analysis is to gain an insight into the underlying health or vitality of the economy and to formulate expectations about future security prices.

The intrinsic value of a security is based on the I. amount of risk. II. current market value of the security. III. discount rate applicable to the security. IV. estimated future cash flows from the security.

Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of

One of the basic premises of security analysis, and in particular fundamental analysis, is that

Fundamental analysis can only be profitable if some securities are at least temporarily mispriced.

Federal budget deficits tend to further depress an already depressed economy.