Investment Planning | Lesson 4: Stock Valuation & Ratio Analysis

Question 1

Which form of the Efficient Market Hypothesis directly refutes Technical Analysis?

a) Strong form.
b) Semi-strong form.
c) Weak form.
d) All of the above.

Answer 1

Answer: C
The weak form of the EMH directly refutes technical analysis. Although all three forms deny technical analysis, the weak form directly contradicts technical analysis as it supports Fundamental Analysis.

Question 2

Which of the following are tools of the Technical Analysts?
1. Market Indicators.
2. Price Indicators.
3. Volume Indicators.
4. Charting.
a) 1 and 3.
b) 2 and 4.
C) 2,3, and 4.
d) 1, 2, 3, and 4.

Answer 2

Answer: D
All of the listed tools are used by technicians in the process of trying to recognize patterns in stocks in order
to anticipate future prices.

Question 3

What is the significance of the calculation for the “Expected Rate of Return”?
a) It provides an investor with knowledge as to the guaranteed rate that will be received on a given invest-
ment.
b) It provides an investor with the rate of return that a given security, meeting certain levels of pricing and
dividends, may be expected to provide.
C) It provides an investor with knowledge of expectations regarding the return specific to a given portfolio
at any level of risk.
d) It provides an investor with required rate of return that must be plugged into the Intrinsic Value formula.

Answer 3

Answer: B
The expected rate of return provides an investor with an approximation of the rate of return that a given security, meeting certain levels of pricing, and dividends, may be expected to provide.

Question 4

What methodology can be used to price (or value) a stock if that stock is a growth stock that pays no dividends?

a) P/E Multiplier.
b) Intrinsic Value Model.
c) Security Market Line Equation.
d) Constant Growth Model.

Answer 4

Answer: A
Options B and D require dividends to calculate the values, while the SML Equation (also known as the Capital Asset Pricing Model) in option C calculates the required rate of return and not the value. It is the P/E multiplier that is used to determine value in a growth stock that pays no dividends.