Chapter 11

If investors in the market become more pessimistic, it is expected that the required return will ----------. a. decrease. b. increase. c. stay the same. d. there is not enough information to answer the question.

b. increase.

The so-called "global settlement" negotiated by the SEC, NYSE and NASD with a number of brokerage firms was intended to: a. ensure more disclosure of relevant information to investors. b. separate investment banking from analyst research. c. stop the practice of buy, sell or hold recommendations in analysts' reports. d. all of the above

b. separate investment banking from analyst research.

How can investors reasonably justify buy actively managed funds instead of index funds? a. higher management fees usually suggests better performance b. the fund consistently outperformed the market, net of fees, and is expected to continue to do so c. the fund outperformed the S&P 500 by 4% last year d. the portfolio manager is new and considered a star analyst

b. the fund consistently outperformed the market, net of fees, and is expected to continue to do so

Passive common stock strategies attempt to minimize: a. capital losses. b. transactions costs, including time spent managing the portfolio. c. market risk. d. company and industry risk.

b. transactions costs, including time spent managing the portfolio.

Which of the following statements concerning index funds and actively managed funds is true? a. Their performance is about equal. d. They tend to have an inverse relationship. c. Actively managed funds tend to outperform index funds. d. Index funds tend to outperform actively managed funds.

d. Index funds tend to outperform actively managed funds.

----------- shifts the weights of securities in the portfolio to take advantage of areas expected to do relatively better than others. a. Portfolio management b. Technical analysis c. Momentum strategy d. Sector rotation

d. Sector rotation

Which of the following statements regarding defensive stocks is true? a. They are often expected to have above-average future growth. b. They often have high P/E multiples. c. They are expected to be adversely affected by high interest rates. d. They often produce necessary items such as food and prescription drugs.

d. They often produce necessary items such as food and prescription drugs.

Which of the following statements regarding a buy and hold strategy are true? a. There are no selection choices to be made under this strategy. b. This strategy is applicable only to large portfolios. c. There is no reinvestment decision to make under this strategy. d. This strategy produces lower transactions and search costs.

d. This strategy produces lower transactions and search costs.

One of the most famous investment advisory services since 1965 is: a. The Wall Street Journal b. Standard and Poor's Corporate Records c. Moody's d. Value Line Investment Survey

d. Value Line Investment Survey

If security markets are totally efficient, the best common stock strategy to take is: a. an asset allocation approach. b. the modern portfolio theory. c. an active strategy. d. a passive strategy.

d. a passive strategy.

The passive investment strategy does not try to find undervalued stocks nor time the market. Instead, it is concerned with: a. achieving returns available in various market sectors at minimum risk. b. achieving maximum returns available in various market sectors. c. achieving minimum risk in various market sectors. d. achieving returns available in various market sectors at minimum cost.

d. achieving returns available in various market sectors at minimum cost.

Individual investors consider the investment decision: a. based on market and economic conditions as consisting of asset allocation. b. based on market and economic conditions as consisting of asset allocation and security selection. c. based on objectives, constraints, and preferences, as consisting of asset allocation. d. based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.

d. based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.

If security prices fully reflect all relevant information available and usable, a securities market is said to be: a. rational. b. in equilibrium. c. effective. d. efficient.

d. efficient.

All of the following represent requirements for conducting effective sector rotation, EXCEPT a. an accurate assessment of current economic conditions. b. a knowledge and understanding of the phases of the business cycle. c. an understanding of the political environment. d. expertise in technical analysis.

d. expertise in technical analysis.

The most important decision to make when building a diversified stock portfolio is: a. individual security analysis. b. asset allocation. c. minimization of market risk. d. maximization of expected return.

d. maximization of expected return.

What is usually considered the biggest risk of market timing? a. getting out of the market too soon b. high transactions costs c. failing to adjust for short-term corrections d. not being in the market at critical times

d. not being in the market at critical times

Sector rotation is a. one form of passive investing. b. an active strategy similar to stock selection. c. an attempt to earn excess returns by varying the percentage of assets in the portfolio. d. not dependent on an accurate assessment of current economic conditions.

b. an active strategy similar to stock selection.

____________ funds are especially popular with momentum investors. a. Sector b. Managed c. Global d. Index

a. Sector

Which of the following is TRUE regarding fluctuations in both individual stock prices and portfolios of stocks? a. aggregate market movements are the largest single factor explaining these fluctuations b. beta is the largest single factor explaining these fluctuations c. standard deviation of returns is the largest single factor explaining these fluctuations d. financial risk is the largest single factor explaining these fluctuations

a. aggregate market movements are the largest single factor explaining these fluctuations

Commodity ETF's are mainly used as speculative plays by: a. hedge fund traders. b. conservative investors. c. mutual fund managers. d. value investors.

a. hedge fund traders.

A general consensus of analysts is that a typical investor should have between ___ and ______ percent of his/her portfolio in international markets. a. 5: 10 b. 10: 20 c. 20: 30 d. 30: 40

b. 10: 20

The Coffeehouse Portfolio suggests investors hold: a. 50% bonds, 50% equities (including the S&P 500, Large Cap Value, International, Small Cap, and Small Cap Value stocks) b. 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs) c. 60% bonds, 40% equities (in two index funds) d. 40% bonds, 60% equities (in two index funds)

b. 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs)

An analyst employed by a pension fund to search for stocks for the fund to invest in would be referred to as: a. a sell-side analyst. b. a buy-side analyst. c. an institutional analyst. d. a money manager.

b. a buy-side analyst.

If stock prices reflect their approximate fair value after transactions costs are taken into account, this is known as: a. after-cost efficiency. b. economic efficiency. c. a market in equilibrium. d. an efficient market.

b. economic efficiency.

A bear market is one characterized by a decline of: a. 10% or more. b. 15% or more. c. 20% or more. d. 25% or more.

c. 20% or more.

An index fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of: a. a value index fund. b. a derivatives index fund. c. an enhanced index fund. d. an active index fund.

c. an enhanced index fund.

Investors following a passive strategy use which of the following as the best estimate of a security's value? a. the dividend discount model. b. Fisher model. c. current market price. d. current earnings per share.

c. current market price.

31. Historically, sell-side equity research has typically been _________to the target company? a. very unfavorable b. unfavorable c. favorable d. neutral

c. favorable

The central focus of a security analyst's job is to: a. ascertain the accuracy of financial statements of selected companies. b. find growth stocks. c. forecast a specific company's return. d. determine the market demand for a specific company's stock.

c. forecast a specific company's return.

The Merrill Lynch case in 2002 confirmed that many analysts: a. were paid too much. b. were unable to accurately pinpoint earnings. c. gave buy recommendations to win investment banking business. d. shared private information about companies with investors.

c. gave buy recommendations to win investment banking business.

Which of the following is NOT considered a passive equity investment: a. investing in a sector ETF. b. investing in a S&P 500 index mutual fund. c. investing in a multi-strategy hedge fund. d. investing in a Russell 2000 index mutual fund.

c. investing in a multi-strategy hedge fund.

The required rate of return for a common stock is defined as the: a. expected return given an assumed set of probabilities and expected cash flows on the stock. b. maximum expected return based on estimates of expected cashflows from the stock. c. minimum expected return necessary to induce an investor to purchase the stock. expected return after evaluation of the risk on the stock has been taken.

c. minimum expected return necessary to induce an investor to purchase the stock. expected return after evaluation of the risk on the stock has been taken.

A significant advantage of index funds is their: a. lower market price than other types of funds. b. sector rotation. c. tax efficiency. d. minimization of risk.

c. tax efficiency.

Market timers attempt to earn excess returns by: a. adjusting the ratio of aggressive equity securities to defensive equity securities. b. shifting the mix of short-term securities to long-term securities. c. varying the percentage of portfolio assets in equity securities. d. adjusting the ratio of primary market securities to capital market securities.

c. varying the percentage of portfolio assets in equity securities.

From 1989 to April 2003, the Japanese stock market lost what percent of its value? a. 50 b. 60 c. 70 d. 80

d. 80

For adequately diversified common stock portfolios, market effects often account for -------- percent and more of the variability of the portfolio's return. a. 60 b. 70 c. 80 d. 90

d. 90

The -------------- provides investors with a method of calculating a required return for a stock. a. dividend discount model b. risk-free rate c. Fisher model d. Capital Asset Pricing Model

d. Capital Asset Pricing Model