Chapter 10
an investor does not need to constantly modify their portfolio markup but wishes to have a certain level of freedom to make adjustments in the portfolio over a 20 year timeframe. the investor would like to keep transaction costs and tax consequences as low as possible and likes to keep risk levels low as well. which of the following would be good choices for an investor who has these characteristics? 1. it would be suitable for this investor to day trade using a high degree of leverage 2. it would be suitable for this investor to use a rebalancing strategy 3. it would be suitable for this investor to use a buy and hold strategy 4. it would be suitable for this investor to use a strategic asset allocation approach
a) 1 and 2 only b) 2 and 3 only c) 2 and 4 only d) 3 and 4 only C) the investor wishes to maintain freedom to adjust the portfolio, but wishes to keep transaction costs, tax consequences, and risks low. with these thoughts in mind, the investor would be best served by using a strategic asset allocation strategy or a rebalancing strategy. these 2 strategies attempt to keep set balances of investments and allow for flexibility by the investor. a day trading strategy using a high degree of leverage carries a high degree of risk and requires a high level of capital commitment. this goes against our investor's desires to keep costs low, taxes low, and risks low. a buy and hold strategy keeps transaction costs low, keeps taxes low, can have a lower degree of risk, BUT it lacks the freedom to make adjustments as is specified for this customer
if an analyst is performing a top-down analysis of a particular industry, which of the following can be expected? 1. the analyst will be looking at individual firms, then building info in an attempt to analyze the industry as a whole 2. the analyst will be looking at the industry as a whole, then deducing information down to the firm level 3. the goal of the analyst is to get a picture of how an industry is going to perform 4. the goal of the analyst is to get a picture of how an individual stock is going to perform
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 D) in a top-down approach, the big picture is viewed first, then things are deduced down to the company level. so here, an industry would be viewed, then analysis would be performed on industry participants, which would end up resulting in getting the picture of how a particular individual stock is going to perform
which of the following mutual fund manager tenures is most impressive
a) 10 years managing an index fund b) 5 years managing a large cap fund c) 3 years managing a small cap fund, and 3 years at a value fund d) 4 years managing a sector fund B) management tenure of 5 years or more at 1 fund would be considered establishing a track record and generally demonstrates competent management. managers who post losses year after year would most likely be replaced, so their tenure would be short. answer b is correct bc the manager has been running the fund for 5 years and managers a fund that requires astute stock picking and trading. answer a is incorrect bc index funds track an index, so stock picking and trading skills are not necessarily required as the manager is simply replicating the index
a new client arrives at your office and sits down to open up an account focused on equity securities. in discussing objectives, the client specifies that she would prefer to keep costs associated with trading activity as low as possible in the account but wants to make sure that the account does not become outdated in terms of investments, as she does not have time to monitor the account regularly. which of the following recommendations best suits this clients needs?
a) a passive investment strategy, where a buy and hold approach is taken using a handful of common stocks b) an active investment strategy, where you as the advisor pick a handful of stocks and trade them on a semi regular basis c) a passive investment strategy, where funds are placed into an index fund d) an active investment strategy, where you as the advisor choose investments based on the economic cycle and projected returns in various industries C) indexing is a form of passive management in an investment account. the index will be comprised of selected stocks, and the relevance of stocks is regularly weighted in relation to whether or not a stock is included in a specific index. for this reason, the portfolio will remain relevant while incurring minimal transaction costs, fulfilling the 2 main objectives specified by the client. in this scenario, a buy and hold strategy does maintain low costs associated with activity, but does not address maintaining a relevant portfolio of securities. active strategies are likely to go against the client's desire to keep certain costs associated with activity low
generally, if stock prices are rising and such moves are above the moving averages for that stock's price over the past measured period it would be a signal to a technical analyst to do which of the following
a) buy the stock b) sell the stock c) hold the stock d) sell the stock short A) although there are many components to moving averages, generally if stock prices are increasing and are exceeding that stocks moving average of past measured periods, it would be a signal to buy the stock for a technical analyst
active portfolio management is best described as
a) buying and holding the investments chosen by the registered investment advisor b) determining the securities to be bought or sold based on investment research performed by the registered investment advisor c) managing a portfolio in attempt to meet the performance of a benchmark portfolio d) managing a portfolio in attempt to exceed the performance of a benchmark portfolio D) active portfolio management would include managing a portfolio using fundamentals in attempt to exceed the performance of a benchmark portfolio
an analyst adjusts net income with figures for amortization and depreciation. which of the following is the analyst seeking?
a) cash flow from operations b) gross revenues c) net revenues d) cash flow from financing activities A) the analyst here is seeking a version of cash flow from operations (net income + depreciation + amortization = cash flow from operations). it is an analytical tool that is used to give a different perspective on the net income of a company. adjustments are made to net income including adjustments for depreciation, amortization, inventory, etc. all of this is an attempt to see the cash position of the company and determine whether the company has stable cash flows and adequate cash for operations, versus needing financing, etc
the following are current ratios of 4 companies in 4 different industries - company a - 0.75:1 - company b - 1.8:1 - company c - 1.8:1 - company d - 2.5:1 which of the following statements is most likely true given this info
a) company d is making the best use of its assets b) company b and company c may not have comparable liquid measures c) company c is less liquid than company a d) company a can cover its short term obligations with its current assets B) when evaluating a company's current ratio, it is important to compare this figure with other companies in the same industry. each industry has an average that represents the norm for that industry. although company b and company c both have a current ratio of 1.8:1, they are in different industries. so, depending on the average for the particular industry sector, the same ratio may be more favorable in one industry sector but not in the other. in the case of company d, if the current ratio is relatively high (above the standard minimum of 2:0), it may be an indication that the company is not making the best use of its current assets. finally, company a is in the worst situation -- it cannot cover its short term debts with its current assets
an investor with a balanced domestic portfolio who is looking for diversification and returns in the event that US markets do not continue to expand, would be most interested in investing in which of the following
a) equities in emerging markets b) equities in US companies with international appeal c) equities in US companies involved in exports of their products d) equities in italian wine exporting companies A) an investor interested in diversification and returns in markets other than US markets would be most interested in investing in equities in emerging markets. they would not invest in US companies since they would be affected by the contraction of US markets in general. they would not choose just 1 foreign country to invest in bc that would not provide them with diversification
a portfolio of tech stocks has a correlation coefficient of -0.70 with its benchmark, the Nasdaq 100 index. if the index fell 20%, at least how much of a change would be expected in the portfolio
a) fall 20% b) rise 20% c) fall 14% d) rise 14% D) a correlation coefficient of -0.70 means the portfolio and the index have a negative correlation. if the index rises, you can expect the portfolio to fall and if the index falls, you can expect the portfolio to rise. the R value is -0.70 and the index fell 20% so you can expect the portfolio to rise at least 14%
if an individual uses all aspects of a company's annual report and the current market price of a stock to identify whether or not to invest in the company, this individual is most likely using
a) fundamental analysis b) technical analysis c) quantitative analysis d) discounted cash flow methodology (DCF) A) within a company's annual report, key information used in fundamental analysis can be found, such as management of the company, financial statements, and product offerings of the underlying company. this in conjunction with the stock's current market price would be used for fundamental analysis purposes. quantitative analysis would use the numbers, but is focused on hard data, so not all aspects of the company's annual report would be useful to a quantitative analyst. technical analysis is focused on market trends, stock trends, and various charts and patterns so the company's annual report would not be a focal point. DCF is an analytical tool to help investors determine the present value of a company in relation to future inflows and outflows
a monte carlo simulation
a) includes a simulation of expected returns which attempts to identify a mean return over time b) identifies results across various real-world studies resulting in a singular predicted outcome c) documents that market performance ultimately impacts all securities in the same manner when measured over extended time periods d) uses a frequency distribution table to indicate potential outcomes that can range significantly D) a monte carlo simulation uses a wide and randomized series of data points across a distribution table in order to identify potential outcomes when there is a random nature to results. for example, a monte carlo situation can be used to identify the probability of various results when rolling dice (two die with numbers 1-6) where the results of each roll are random (a number between 1 and 12) for where certain numerical outcomes are more probable than others given the input
sector rotation investment strategy would invest in all of the following except
a) industrials in an expanding economy b) utilities in a contracting economy c) precious metals at the peak of an economy d) technology at the trough of an economy C) sector rotation investors generally invest in consumer staples at the peak of an economy not precious metals, thus anticipating a downturn in the economy
which of the following best describes "strategic asset allocation"
a) it is an investment strategy where no trading or re-balancing takes place in the account until a predetermined time such as one year after initial balancing is completed b) it is an investment strategy with a focus on short term asset mixes where there are targeted balances, but adjustments can be made and are made within a range based on current market condition c) it is an investment strategy where the assets in a portfolio are balanced and generally kept at an assigned balance over the long-term d) it is an investment strategy where market timing and stock picking are used to constantly rebalance the portfolio in an attempt to beat a benchmark or expected return C) strategic asset allocation keeps an assigned balance over the long term. tactical asset allocation focuses on short term asset mix. active asset allocation includes stock picking and market timing to constantly rebalance to beat a benchmark or expected return. passive asset allocation refers to the investment strategy where rebalancing is performed at pre-determined times such as quarterly, semi-annually, or annually
regarding technical analysis, which of the following would be correct
a) most analysts subscribe to the FIFO theory b) market forecasting is based on balance sheets and income statements c) projections are based on current stock price trends and their relationship to prior trends d) it uses yields and earnings in the analysis of a stock C) technical analysis looks at the market forces, rather than the company's financial status. therefore, c would be correct
an investment strategy which purchases appropriate high quality investments to fit a portfolio and maintains the portfolio with the anticipation of appreciation and income is known as which of the following strategies
a) passive asset allocation b) strategic asset allocation c) dollar cost averaging d) buy and hold D) an investment strategy where the investment manager designs a portfolio with the purchase of high quality securities to fit that portfolio, then holds the investments with the anticipation of appreciation and income is known as the buy and hold strategy
which of the following best describes altering the asset mix of a portfolio over the long term to maintain assigned balances
a) strategic allocation b) tactical allocation c) rebalancing d) risk adjustment A) strategic asset allocation is when the assets in a portfolio over the long term are balanced and generally kept at the assigned balance. strategic and rebalancing have very similar definitions. they both are bringing back the balances of a portfolio to the assigned balance. the key words here to know it was strategic vs rebalancing is long term. strategic allocation maintains the assigned balance over the long term
mark is looking to add a few stocks to his portfolio. he takes time to review the financial statements of several companies and various aspects of the stock price, debt of the company, and various forms of valuation for the company. mark is using
a) technical analysis, where the ultimate goal is to identify trends in the price fluctuations of the stock and buy when an upward trend is expected b) fundamental analysis, where the ultimate goal is to identify trends in the price fluctuations of the stock and buy when an upward trend is expected c) technical analysis, where the ultimate goal is to identify undervalued companies and buy with the anticipation that the underlying company's value will increase d) fundamental analysis, where the ultimate goal is to identify undervalued companies and buy with the anticipation that the underlying company's value will increase D) mark is using fundamental analysis. fundamental analysis involves review of a company's financials and seeks to find companies that are undervalued where stock prices should increase as a company's pricing moves to appropriate levels. this differs from technical analysis, where the goal is to identify trends and patterns in relation to a company's stock price and buy when an upward trend is expected
the dow jones industrial average is
a) the market price of 60 selected common stocks divided by a constant b) the market price of 30 selected common stocks divided by a constant c) the market price of 500 industry stocks divided by a constant d) the market price of 65 selected stocks divided by a constant B) the dow jones industrial average is the market price of 30 selected common stocks divided by a constant
a client would like to know the average price that they paid when buying a set number of shares of XYZ common each month over the past 12 months. which of the following best represents the desired figure
a) the moving average b) the annualized return c) the mode d) the mean price D) the mean is the average price in a series of prices or data points and would represent the average cost when purchasing a set number of shares of common stock. the moving average is used by an analyst to smooth out the price moves of a security over a specific amount of time. the annualized return is the annual rate of return on the investment. the mode is the value that occurs most frequently in a series of prices or data points
which of the following is used by money managers to determine whether a stock is undervalued or overvalued
a) the price to book ratio b) the price to earnings ratio c) the quick test (acid test) d) the current ratio A) the price to book ratio is used by money managers to determine whether a stock is overvalued or undervalued. the formula is market price/book value per share = price to book. the ratio gives investors an idea of the relationship between the company value per share and the market value at which shares are currently trading
a portfolio manager moves clients' money between stocks in different companies in different industries such as moving from the energy stocks, to manufacturing, to technology in defined periods. which best describes this scenario?
a) this is a dollar cost averaging approach b) this is an example of portfolio rebalancing c) this is an example of asset rebalancing d) this is an example of sector rotation D) this type of rotation would be sector rotation strategy bc the manager moves from one sector to another based on the economy
