Chapter 1: Analysis of Investor and Shareholder Data

Question 1

Growth Investment Strategy

Answer 1

Investing in stocks that have a high P/E ratio. Looking got big capital gains, not dividends.

Question 2

Aggressive Growth Investment Strategy

Answer 2

Seeking the highest possible capital gains. Willing to take on substantial risk.

Question 3

Capital Appreciation Investment Strategy

Answer 3

Seeking long-term growth of their investment.

Question 4

Value Investment Strategy

Answer 4

Seek to invest in relatively cheap stocks with low P/E ratios compared to their peers.

Question 5

Growth at a Reasonable Price (GARP) Investment Strategy

Answer 5

Seeking to invest in stocks with both a high potential for earnings growth & a reasonable P/E ratio. Looking for stocks with low PEG ratios.

Question 6

Income Investment Strategy

Answer 6

Seeking investments with consistent & reliable payments. This is the most conservative investment strategy, with the goal of capital preservation.

Question 7

Long Position

Answer 7

The conventional investment strategy of buying low and selling high. Has full ownership rights in the investment.

Question 8

Short Position

Answer 8

Sell short and buy to cover. Hoping for a decline in investment value. No ownership. Risk of unlimited losses.

Question 9

Distressed Investing

Answer 9

Investing in companies that are in financial distress, in or emerging from bankruptcy. Debt is the preferred investment due to the liquidation preference. Certain institutional and pension investors are barred from distressed investing.

Question 10

Deep Value Investing

Answer 10

Investing in stocks that are trading significantly below their fundamental value.

Question 11

Momentum Investing

Answer 11

Short-Term investing in stocks that are trading on high volume. Fundamental analysis is irrelevant.

Question 12

Quantitative Investing

Answer 12

The use of powerful computers to analyze vast amounts of financial data to make investment decisions. Primarily used by hedge funds.

Question 13

Arbitrage Investing

Answer 13

Exploiting disparities in the price of a security between two markets. Usually a low risk strategy.

Question 14

Risk (Merger) Arbitrage

Answer 14

Buying the target company stock under the assumption that an offer price will be higher than the current market price. Can also short the acquirer stock on the assumption that the price will decrease upon announcement.

Question 15

Market (Systematic) Risk

Answer 15

The risk that economic, political, or market conditions will affect an entire asset class. Cannot be eliminated through diversification within the same asset class. A stock’s beta coefficient indicates how sensitive it is to market risk.

Question 16

Systemic Risk

Answer 16

The risk that an entire market or financial system will collapse.

Question 17

Credit (Default) Risk

Answer 17

The risk that a borrower will fail to make payments to the lender when due.

Question 18

Inflation Risk

Answer 18

The risk that investment returns will be worth less than expected because of diminishing purchasing power resulting from rising inflation.

Question 19

Deflation Risk

Answer 19

The risk that business investment will slow because investment is expected to be cheaper in the future.

Question 20

Currency (Exchange Rate) Risk

Answer 20

The risk that changes in the exchange rate will reduce an investor’s return. Can be mitigated through hedging strategies.

Question 21

Interest Rate Risk

Answer 21

The risk that an increase in interest rates will cause a decline in the price of a fixed rate security. Interest rate risk increases with the time to maturity.

Question 22

Reinvestment Risk

Answer 22

The risk that an investors capital will earn a lower return than the original investment. Present on callable bonds.