chapter 23

Question 1

______ is the measure of an asset’s volatility compared to the market as a whole.

Answer 1

Beta

Question 2

What is the beta of the market (S&P 500)?

Answer 2

1

Question 3

If an asset outperforms the market when prices are up/underperforms when prices are down, its beta is _____ than 1.00.

Answer 3

greater

Question 4

True or False: Fundamental analysis focuses on analyzing the market using charts, patterns, trends, and short interest.

Answer 4

False. This is Technical Analysis

Question 5

The analysis of a specific company (its balance sheet, income statement, etc.) are the focus of the ___________ analyst.

Answer 5

Fundamental

Question 6

____________ - ____________ = Working Capital

Answer 6

Current Assets - Current Liabilities = Working Capital

Question 7

____________ ÷ ____________ = Current Ratio

Answer 7

Current Assets ÷ Current Liabilities = Current Ratio

Question 8

This tests a company’s ability to pay its current liabilities with its current assets but does not include inventory.

Answer 8

Quick Asset Ratio

Question 9

(Current Assets - ____________) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

Answer 9

(Current Assets - Inventory) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

Question 10

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.

Answer 10

liquidity ratios

Question 11

Identify the following formula: (Net income - preferred dividends) ÷ Common shares outstanding

Answer 11

Earnings per Share

Question 12

To find a stock’s current yield, the formula is: ____________ ÷ ____________

Answer 12

Annual Dividend ÷ Current Market Price

Question 13

Identify the following formula: Stock’s market price ÷ EPS

Answer 13

Price to Earnings

Question 14

Identify the following formula: Annual dividend ÷ EPS

Answer 14

Dividend payout ratio

Question 15

How would the declaration of a dividend affect a company’s balance sheet?

Answer 15

1) Retained earnings is reduced and 2) Current liabilities is increased (working capital is reduced)

Question 16

How would the payment of a dividend affect a company’s balance sheet?

Answer 16

1) Current assets (cash) is reduced and 2) Current liabilities is reduced (working capital stays the same)

Question 17

Identify the following formula: Total Assets = Total Liabilities + Shareholder’s Equity

Answer 17

Balance Sheet Equation

Question 18

What is the Capital Asset Pricing Model (CAPM)?

Answer 18

A model of the relationship between expected risk and expected return

Question 19

True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.

Answer 19

True

Question 20

What theory analyzes the amount of a company’s stock that has been shorted and not yet covered?

Answer 20

short interest theory

Question 21

A large short interest is a __________ indicator.

Answer 21

bullish

Question 22

The _________ Theory states that small public investors are generally wrong.

Answer 22

Odd Lot

Question 23

An increase in odd lot buying is a _________ indicator.

Answer 23

bearish

Question 24

An increase in odd lot selling is a _________ indicator.

Answer 24

bullish

Question 25

What theory states that all known relevant information is reflected in a security's price?

Answer 25

Efficient Market Theory or Random Walk Theory

Question 26

True or False: The Efficient Market Theory indicates that, through analysis, undervalued situations can be discovered.

Answer 26

False

Question 27

According to The Dow Theory, what two averages must reach a new high or new low to confirm a major trend?

Answer 27

Dow Jones Industrial Average and Dow Jones Transportation Average

Question 28

The Dow Jones Composite Average comprises ____ industrial stocks, ____ transportation stocks, and ____ utility stocks.

Answer 28

30/20/15

Question 29

____________ level is the price level at which point a stock stops increasing.

Answer 29

Resistance

Question 30

__________ level is the price level at which point a stock stops decreasing.

Answer 30

Support

Question 31

True or False: The head and shoulders patterns are indicative of the reversal of a trend.

Answer 31

true

Question 32

Is the head and shoulders top formation the reversal of an upward or downward trend?

Answer 32

upward

Question 33

A head and shoulders top formation is considered a __________ indicator.

Answer 33

bearish

Question 34

Is the head and shoulders bottom formation the reversal of an upward or downward trend?

Answer 34

downward

Question 35

A head and shoulders bottom formation is considered a __________ indicator.

Answer 35

bullish

Question 36

If given a stock's P/E ratio and market price from a stock table, how is EPS calculated?

Answer 36

Market price ÷ P/E ratio

Question 37

How is cash flow calculated?

Answer 37

Net income plus depreciation. Depreciation is added back, since it is a non-cash expense

Question 38

How would the issuance of debt affect a company's balance sheet?

Answer 38

1) Current assets (cash) is increased and 2) Long-term liabilities is increased (Working capital is increased)

Question 39

How would the issuance of stock affect a company's balance sheet?

Answer 39

1) Current assets (cash) is increased and 2) Shareholder's Equity is increased (Working capital is increased)

Question 40

The breakout of an area of resistance is a __________ indicator.

Answer 40

bullish

Question 41

The breakout of an area of support is a __________ indicator.

Answer 41

bearish

Question 42

True or False: The Wilshire Associates Index is considered the broadest of the broad-based indexes.

Answer 42

True

Question 43

Is the Dow Jones Industrial Average considered broad or narrow?

Answer 43

Broad