Question 1

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 an investor who likes to gamble to have a portfolio that includes only speculative securities such as options and futures, interest-rate swaps, and so forth. Instead, they would recommend diversification and a balance between low-risk and high-risk investments to manage risk and maximize returns.

Question 2

In general,financial statement analysis involves a comparison of a firm's operating performance and financial position with that of other firms in the same line of business and can be used to form expectations about the firm's future cash flow distributions.

Accepted Answer

Financial statement analysis involves comparing a firm's operating performance and financial position with that of other firms in the same industry. This analysis can provide insight into the firm's future cash flow distributions.

Question 3

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

The answer of If security markets were truly strong-form efficient,you...

Question 4

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

The answer of Methods (models)used by technical analysts are designed...

Question 5

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) valuation method 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, making it an attractive valuation method.

Question 6

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

This statement is false. The monetary policy of the United States is primarily managed by the Federal Reserve through actions such as adjusting interest rates and implementing quantitative easing programs. While the U.S. Treasury does have the ability to print and distribute currency, this alone does not determine the country's overall monetary policy.

Question 7

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 8

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

Accepted Answer

The answer of A mispriced stock exists when the market...

Question 9

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

Accepted Answer

Value investors believe that the stock market can misprice stocks, causing them to be undervalued or overvalued. Value investors aim to find undervalued stocks that are trading below their intrinsic value, and therefore present a buying opportunity.

Question 10

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 statement is true. The value of an asset is typically determined by its ability to generate cash flows in the future, and the present value of those expected cash flows is used to determine the asset's current value. This is a commonly used method in finance and investment analysis.

Question 11

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

The answer of Using the dividend discount model (DDM)to value...

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

Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms.

Accepted Answer

Durable goods, which are long-lasting products like cars and appliances, often require financing and are not essential to daily life. As a result, changes in interest rates can greatly impact consumer demand for these goods, making it a more sensitive industry to interest rate changes compared to industries that produce staple goods, such as food and household products, which are essential and less impacted by interest rate fluctuations.

Question 14

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

The answer of If security markets were truly strong-form efficient,then...

Question 15

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

The answer of If the financial markets are strong-form efficient,then...

Question 16

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 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. EVA is calculated by subtracting the cost of capital from the net operating profit after taxes (NOPAT), with the idea being that if the firm generates more profit than the cost of its capital, it is creating value for its shareholders.

Question 17

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 focus on market trends and price movements, and aim to use this information to make predictions about future stock prices. In contrast, fundamental analysts analyze a company's financial statements and industry outlook to determine the intrinsic value of a stock. However, this type of analysis takes time and may not be able to predict short-term market movements. Therefore, technical analysts may be able to take advantage of market trends more quickly than fundamental analysts who focus on intrinsic value.

Question 18

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

It is actually risky to invest in companies in the introductory stage of their industry life cycle because they are still in the process of establishing themselves and may not have a proven track record of success. Additionally, they may require significant capital investments that may not yield returns for several years. Therefore, investing in these companies comes with a higher degree of risk, and potential investors should carefully evaluate the company before making any investment decisions.

Question 19

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

This is a common advice given by investment professionals as they believe that sticking to a disciplined investment strategy will likely yield better results in the long run. It is important to avoid making impulsive decisions based on short-term fluctuations in the market.

Question 20

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

Investing in cyclical industries, which are sensitive to economic cycles, does not necessarily provide diversification if the portfolio already consists of stocks from the Dow Jones Industrial Average, which may include cyclical stocks. Diversification typically involves spreading investments across different asset classes or sectors that do not move in tandem.

Quiz 17: Investment Analysis and Valuation Techniques