Ch 4 Practice Test Flashcards
Which one of these best describes the requirements of an investment strategy?
a. competencies, resources, goal, method
b. ability, method, opportunity, method
c. method, opportunity, commitment, resources
d. opportunity, cooperation, goal, method
a. competencies, resources, goal, method
Which one of these statements is correct regarding dollar-cost averaging?
a. the amount invested periodically
b. provides protection if an investment falls over a long time
c. the time period between investments is fixed
d. purchases the same number of shares each period.
c. the time period between investments is fixed
Which one of the following statments regarding the investment strategy of value averaging is CORRECT?
a. buys fewer shares in a bear market than would dollar cost averaging.
b. uses varying periods between investments
c. can require a sale of the securities being averaged.
d. invests the same dollar amount each period.
c. can require a sale of the securities being averaged.
If between periods, the account value increases more than the target increase in value, value averaging would require the sale of shares to decrease the accounts value to the target value.
the failure of highly skilled institutional investors to outperform on a regular basis ‘unmanaged’ benchmarks, like the S&P 500 index, strengthens the argument of which one of the following investment strategies?
a. buy and hold
b. low P/E
c. dollar cost averaging
d. contrarian
a. buy and hold
Unmanaged benchmarks, like the S&P 500 index, are based on the efficient market hypothesis: buy and hold strategy supports the efficient market hypothesis.
Which one of the following industries would be expected to perform well in the early stage of an economic expansion?
a. chemicals
b. food
c. consumer credit
d. equipment manufacturers
c. consumer credit
Which one of the following indicators would a contrarian investor interpret as a bearish indicator?
a. a decreased short interest ratio
b. large cash positions in mutual funds
c. bearish investment sentiment
d. a high put-call ratio
a. a decreased short interest ratio
A decreased short interest ratio indicates the consensus view that the market will rise, so contrarians would view this as a bearish indicator.
All of the following are true regarding the PE ratio, except
a. if a stocks price grows faster than its earnings, the stock will have a higher P/E ratio
b. if a stocks price grows slower than its earnings, it is considered undervalued by the market
c. it is an absolute measure of a stock valuation
d. a stocks P/E ratio should always be compared to its historic performance as well as to the average P/E for its industry and the market
c. it is an absolute measure of a stock valuation
When mutual fund cash positions rise above 10% or more, this is an indication for contrarian investors to
a. become more bearish
b. allocate all of their available funds into treasuries
c. become more bullish
d. allocate all of their available funds into stocks.
c. become more bullish
When mutual funds have large cash positions, 10% and more, and when investment advisers are all doom and gloom, contrarians grow bullish.
Which one of the following is a bearish contrarian signal?
a. high purchasing by specialists
b. high short selling
c. high cash positions in mutual funds
d. a low put-call ratio
d. a low put-call ratio
A low put call ratio is typically seen at market tops as investors buy valls (expecting prices to rise) and do not buy puts (which would be done when expecting prices to fall), because the put-call ratio is a bearish sign.
Which of theses characteristics are typically associated with growth stocks?
I. distinctive products or services
II. high price to book ratios
III. low dividend yields
IV. low P/Es
a. I, III, and IV
b. I, II, and III
c. II and III
d. I, II, III, and IV
b. I, II, and III
As described by Perritt, which of the following characteristics describe a sound small-cap stock investment strategy?
I. selling when 40% of the company’s shares become owned by institutional investors
II. Making sure management does not have a tangible ownership interest in the business
III. owning 20-30 issues
IV. having a three to five year holding period
a. II an III
b. I, II, III, and IV
c. I, III, and IV
d I and II
c. I, III, and IV
One reason to use active investment management is
a. lower transaction expenses
b. the opportunity for higher returns
c. the potential for downside protection
d. that the markets are fairly efficient.
c. the potential for downside protection
When using a tax swap strategy, an investor would
a. sell one bond at a capital loss and buy a different bond issue
b. buy a combination of short-term and long-term bonds
c. buy a number of bonds with staggered maturities
d. sell one bond and buy a higher-yielding bond
a. sell one bond at a capital loss and buy a different bond issue
Which of these is considered an enemy of effective investment strategies?
a. expectations based on historic data
b. inadequate time horizons
c. being unemotional during times of market volatility
d. using diversification over time through dollar cost averaging
b. inadequate time horizons
Investors who strongly believe in the efficient market hypothesis would select which one of these types of mutual funds?
a. a value fund
b. an index fund
c. a growth fund
d. an international fund
b. an index fund
Which one of the following industries tends to do well in a late stage of an economic expansion?
a. consumer staples
b. consumer credit
c. basic materials
d. capital goods
d. capital goods
Dreman’s advice to the investor centers on three rules. Which of the following is NOT one of those rules?
a. select only industry average P/E stocks
b. Diversify with 20-30 stocks in 15+ industries
c. Select only low P/E stocks
d. invest only in medium to larger companies listed on the NYSE
a. select only industry average P/E stocks
Dreman’s three rules were select only low P/E stock, diversify with 20-30 stocks in 15+ industries, and invest only in medium or larger companies listed on the NYSE
Which one of these is NOT an indicator utilized by contrarian investors?
a. short selling
b. mutual fund cash positions
c. put-call ratio
d. open interest
d. open interest
Benjamin Graham’s style of investing can be described as which of the following?
a. contrarian
b. bottom up
c. top down
d. sector rotation
b. bottom up
All of these are indicators that a contrarian investor would use as cues for their own buying and selling of stocks, EXCEPT
a. average daily trading volume
b. specialists sentiment
c. investment advisory opinions
d. put-call volume ratio
a. average daily trading volume
Growth stocks typically have which of these characteristics?
I. low PE ratios
II high profit margins
III. high betas
IV. large dividends
a. I, II, III and IV
b. III and IV
c. II and III
d. I, II and IV
c. II and III
One of the characteristics regarding growth stocks is that the earnings per share growth rate should be at least what percentage?
a. 25%
b. 10%
c. 15%
d. 20%
c. 15%
Which one of the following is not a characteristic of a growth stock?
a. high profit margins
b. low to average betas
c. distinctive products or services
d. small dividends
b. low to average betas
Growth stocks typically have high betas, not low betas.
One reason to use passive investing is that
a. long term returns can be better when compared with the returns of active management
b. markets are inefficient
c. it costs the same as active management but the returns are usually higher
d. there is potential for downside protection
a. long term returns can be better when compared with the returns of active management
