Fin492 Exam 2

Define the "Three Step Process" of security valuation discussed in the textbook?

Analysis of alternative economies and security markets, analysis of alternative industries, analysis of individual companies and stocks

The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.

False

An increase in the required rate of return k will tend to cause an increase in the P/E ratio.

False

Under the top down approach, an optimistic economic and stock-market outlook for a given country should lead to an underweighting of the allocation to that particular country in investment portfolio.

False

The deconstruction of the Price/Sales ratio discussed in class and in the textbook reveals that investors should pay more for a company if it has which of the following?

Higher profit margin, more efficient operations, less risky cash flows, higher growth

"Quality financial statements" are those which are a good reflection of the firm's financial reality, and which do not use accounting tricks and one-time changes to make the firm appear strong that it really is.

True

The term "Seeking Alpha" immediately suggests a passive investment management approach.

false

Buy-side analysts typically cover the stocks within a particular industry and produce reports that are intended to help the sell-side reach investment decisions.

false

By definition growth companies have growth stocks.

false

In the U.S., recent years have seen a distinct increase in the number of CEOs who also serve as the chairman of the board of directors of their companies, with the percentage of companies with such and arrangement now being over 50%.

false

In the context of discounted cash flow based valuation, FCFF and FCFE require the use of the same discount rate.

false

In virtually every past year, the clear majority of active portfolio managers have outperformed the market average.

false

Strategic asset allocation frequently adjusts the asset class mix in the portfolio to take advantage of changing market conditions.

false

The three basic techniques for constructing a passive index are: full replication, sampling, and normal backwardation.

false

The total number of publicly traded companies in the U.S. has increased noticeably in recent years.

false

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

true

A corporation's earnings growth and dividend yield will be impacted by GDP growth.

true

A cyclical company's sales and earnings are heavily influenced by the aggregate level of business activity.

true

A direct listing is a new method for taking a firm public in which the initial pricing is done by stock exchange designated market makers and no new funding is raised for the firm.

true

A growing percentage of institutional investors are integrating environmental, social, and governance (ESG) factors into their investment decisions.

true

A growth investor focuses on the current and future economic "story" of a company, with less regard for share valuation.

true

A portfolio manager who uses tactical asset allocation is attempting to create alpha.

true

A stock pitch usually includes an analysis of trends in the industry in which the company in question operates.

true

An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

true

An example of a relative valuation technique would be if the analyst estimated the value of a particular firm's stock by multiplying that firm's expected free cash flow per share by the industry average Price/Cash Flow ratio.

true

An overvalued investment is one which is so expensive that the investor will not receive a fair return if the investment is undertaken.

true

At present, there are multiple investment funds available to investors which use a strategy based on some variation of the general idea of a multifactor model.

true

Capital allocation is the description of the process by which management uses resources to create value on behalf of shareholders.

true

Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.

true

Corporate governance refers to the rules, policies, and procedures that are used to direct and control a company.

true

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

true

Future tax rates are difficult to estimate because they are politically influenced and the tax code is therefore not necessarily logical.

true

In any multi-stage discounted cash flow based valuation, the terminal value captures the portion of the firm's value arising from its long-term, steady growth stage.

true

In attempting to put multifactor models into practice, the two general approaches have been either macroeconomic or microeconomic in nature.

true

Insured asset allocation is a strategy to limit investment losses by shifting funds between an existing equity portfolio and a risk-free security.

true

Investors want directors who will voice their opinion, who are not beholden to the CEO or board chair, and who have enough experience that their opinion carries weight on the board.

true

Leading indicators of the business cycle include economic series that reach peaks or troughs before the peaks and troughs of the overall economy.

true

Many analysts recommend that you should read an annual report "backward" - that is, you would read the footnotes first.

true

Multifactor models of risk and return are an attempt to use the general idea of the APT, but avoid the problem of the theoretical factors being unidentified in advance.

true

Nonoperating assets are assets which are not directly required for the day to day operation of the firm, and which therefore do not contribute to the generation of the firm's Free Cash Flow.

true

One difficulty faced by investors who choose to invest in funds which use multifactor investing models is that the performance of such funds is difficult to benchmark because each fund could be using a completely separate model.

true

One of the economic series included in the Conference Board coincident indicator is the index of industrial production.

true

One way to distinguish between the strategies adopted by various portfolio managers is to decompose the total actual return that the portfolio manager attempts to produce into a passive and an active component.

true

Present value of free cash flow to equity (FCFE) resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

true

The APT posits that the equilibrium expected rate of return on a security is a linear function of multiple common risk factors, but does not specify the exact factors.

true

The Arbitrage Pricing Theory (APT) makes fewer assumptions than the CAPM and does not specifically require the designation of a market portfolio.

true

The CAPM generalizes the risk-return trade-off in the capital market line (CML) to allow for the consideration of individual securities as well as entire portfolios.

true

The CAPM has been subjected to extensive empirical testing with mixed findings.

true

The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods.

true

The economy and the stock market have a strong, consistent relationship, but the stock market generally turns (changes direction) before the economy does.

true

The goal of a stock pitch is to convince an investor to buy a stock or to sell a stock short.

true

The goal of active equity management is to earn a return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis.

true

The integrated asset allocation strategy separately examines capital market conditions and the investor's objectives and constraints.

true

The pattern in the first day of trading on the exchange after the recent Lyft IPO has been attributed by some market commentators as having been oversubscribed by retail investors.

true

The price-to-sales ratio is considered the predominant firm valuation multiple for many of the so called "unicorn" digital economy companies, because many of these companies have not generated positive earnings until well after their IPOs.

true

The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.

true

The returns from the overall market (or an individual stock) can be thought of as a combination of three factors: earnings growth, multiple expansion (or contraction), and dividend yield.

true

The term "economic moat" is used to describe the ease or difficulty with which competitors can potentially take market share from a company by way of replicating its products or services.

true

The two essential components that are required in order to carry out discounted cash flow based asset valuation are (1) the forecasted stream of expected cash flows and (2) the required rate of return.

true

The use of the sustainable growth rate equation to estimate the rate of potential corporate growth requires the assumptions that 1) the firm will keep its capital structure the same and 2) the firm is not becoming any more or less efficient.

true

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.

true

Unlike the CAPM, the APT cannot be completely depicted in a simple two-axis graph because the APT typically is conceptualized as having two or more factors in contrast to the CAPM's single factor (beta).

true

Using the APT for practical investing decisions is similar to that undertaking with the CAPM - that is, purchase securities which the model indicates as undervalued and sell securities which the model indicates are overvalued.

true

When using a relative valuation technique, it is important to ensure that the analyst has identified an appropriate set of comparable entities.

true

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

true