Q&A Hero

Q: When using the P/E valuation model, it is important to remember that the multiplier is more volatile than the earnings component.

Q: If the economy is prospering, investors expect corporate earnings to rise.

Q: If interest rates rise, the risk free rate of return declines.

Q: P/E ratios are generally low when interest rates and inflation are high.

Q: The Dow Jones Industrial Average provides the best representation of the performance of U.S. stocks.

Q: Most investors should keep a watch on the Federal Reserve because of the effect of the money supply on interest rates.

Q: The typical business cycle in the United States seems to lead the stock market's turning point by a few months.

Q: The stock market is a leading indicator of the economy because investors discount future earnings.

Q: You would expect a lower PSR for a retail company than for a biotechnology company.

Q: Declining interest rates in the market should send P/E ratios, on average, higher.

Q: Companies with significant intangible assets on their balance sheets may receive a slightly lower P/E ratio versus companies with Difficult assets.

Q: EVA analysis reflects an emphasis on risk-adjusted return on capital.

Q: Other things equal, the higher the required return, the lower the P/E.

Q: If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and should be sold short.

Q: Under the zero-growth dividend model, expected dividends are the same as current dividends.

Q: If the growth rate in dividends is greater than the required rate of return, the price found under the constant growth model will be negative.

Q: Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.

Q: If all investors use the constant growth dividend model to value the same stock, they will all arrive at the same estimate of value.

Q: Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.

Q: Standard deviations for well-diversified portfolios are reasonably steady over time.

Q: With a discrete probability distribution: a. a probability is assigned to each possible outcome b. possible outcomes are constantly changing c. an infinite number of possible outcomes exist d. there is no variance

Q: The major problem with the Markowitz model is its:lack of accuracypredictability flawscomplexityinability to handle large number of inputs

Q: Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Variance Weight (in the portfolio) Security A 10 0.3 Security B 20 0.7 a. 17.0 percent b. 5.4 percent c. 2.0 percent d. 3.7 percent

Q: When the covariance is positive, the correlation will be: a. positive b. negative c. zero d. impossible to determine

Q: Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are a. perfectly positively correlated with each other b. perfectly independent of each other c. perfectly negatively correlated with each other d. of the same category, e.g. blue chips

Q: Markowitz's main contribution to portfolio theory is: a. that risk is the same for each type of financial asset b. that risk is a function of credit, liquidity and market factors c. risk is not quantifiable d. insight about the relative importance of variance and covariance in determining portfolio risk

Q: A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in a. both the expected return and the risk of the portfolio b. only the expected return of the portfolio c. only the risk level of the portfolio d. neither the expected return nor the risk level of the portfolio

Q: Portfolio risk is most often measured by professional investors using the:expected valueportfolio betaweighted average of individual riskstandard deviation

Q: When returns are perfectly positively correlated, the risk of the portfolio is:zerothe weighted average of the individual securities riskequal to the correlation coefficient between the securitiesinfinite

Q: Which of the following statements regarding portfolio risk and number of stocks is generally true?Adding more stocks increases riskAdding more stocks decreases risk but does not eliminate itAdding more stocks has no effect on riskAdding more stocks increases only systematic risk

Q: The SIPC limit for insurance coverage on cash is _____________________.

Q: Which of the following statements regarding the short interest ratio is true? a. It is calculated by the total shares sold short divided by total shares outstanding b. It indicates the dollar amount needed to cover all short positions c. The higher the ratio, the more bullish investors are d. It is the amount of shares sold short divided by average trading volume

Q: Which of the following statements is true regarding short sales? a. An investor can only remain in a short sale 6 months or less. b. Short sales can be done on either a cash or margin account. c. Short sellers borrow the stock sold short from the exchanges. d. Dividends paid during the short sale must be covered by the seller.

Q: An investor buys 100 shares of Walmart at $45 per share on margin with an initial margin of 70 percent and a maintenance margin of 25% percent. In two months, the stock goes to $56. Below what price will a margin call occur?$13.50$54.00$42.00$18.00

Q: An investor buys 100 shares of Walmart at $45 per share on margin with an initial margin of 70 percent and a maintenance margin of 25% percent. In two months, the stock goes to $56. What is the actual margin of the stock when it's at $56?65.9%75.9%79.9% 80.9%

Q: If maintenance margin is not maintained, the broker will place: a. a sell order on sufficient securities to ensure the portfolio is compliant with maintenance margin requirements b. a sell order on sufficient securities to ensure the portfolio is compliant with initial margin requirements c. contact the investor with a margin put d. contact the investor with a margin call

Q: Margin Call price is the amount borrowed divided by: a. number of shares x (1 - initial margin proportion) b. number of shares x (1 - maintenance margin proportion) c. current value of the shares purchased x (1 - initial margin proportion) d. current value of the shares purchased x (1 - maintenance margin proportion)

Q: The interest rate charged on margin accounts is determined by: a. adding a percentage to the broker call rate. b. adding a percentage to the margin interest rate. c. subtracting a percentage to the broker call rate. d. subtracting a percentage to the margin interest rate.

Q: Since 1974, the current initial margin requirement on stock is: a. 30 percent.b. 40 percent.c. 50 percent.d. 60 percent.

Q: The initial margin requirement on security trades is set by the: a. SECb. FINRAc. SIPCd. Federal Reserve

Q: Which of the following statements regarding arbitration of broker-client disputes is not true? a. There is a cost to arbitration. b. Arbitration is a binding process that can determine damages. c. It is advised that investors hire a lawyer for the arbitration process. d. Arbitration rulings are frequently appealed.

Q: Single-country funds have traditionally:outperformed international funds.underperformed international funds.been open-end.been closed-end.

Q: The 2 largest fund supermarkets are: a. Merrill Lynch and Charles Schwab b. Edward D. Jones and Vanguard c. Vanguard and Fidelity d. Charles Schwab and Fidelity

Q: A portfolio of directly-owned individual securities guided by an investment manager is known as a: a. IRA. b. IMA. c. SMA. d. DCA.

Q: Unregulated companies that seek to exploit various market opportunities and require a substantial investment from investors are known as: a. derivatives. b. options. c. hedge funds. d. SMAs.

Q: Each investment company investor shares in the returns of the fund's portfolio and also shares in the cost of running the fund.

Q: To qualify as a regulated investment company, a fund must distribute at least 50 percent of its taxable income to the shareholders.

Q: Buying shares of a mutual fund is an example of indirect investing.

Q: Most unit investment trusts are considered active investments.

Q: Under the Securities Act of 1933, investment companies are required to register with the SEC.

Q: ETFs are managed investment portfolios that offer investors targeted diversification.

Q: Many ETFs report little or no capital gains over the years giving them greater tax efficiency than many mutual funds.

Q: Who benefits from a futures contract, a call contract, and a put contract, if prices fall?

Q: What are some advantages of asset-backed securities to investors?

Q: Rank (lowest to highest) the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint: common stock, corporate bonds, U. S. Treasury bonds, options, preferred stock..

Q: Explain how writing option contracts (both puts and calls) can generate income for owners of the underlying stock.

Q: What are two direct and one indirect method for individuals to invest in foreign stocks?

Q: In what sense is a stock selling for 12 times earnings 'cheaper' than a stock with a P/E ratio of 20?

Q: How is the total book value of equity affected by stock splits?

Q: How is the earnings retention rate related to the dividend payout rate?

Q: Compare the cash flows an investor expects from coupon bonds, zero-coupon bonds, and preferred stock.

Q: Distinguish between direct and indirect investing.

Q: LEAPS have maturities dates up to 10 years.

Q: Will risk-averse investors ever include commodity futures or options in their portfolios? Explain.

Q: Define risk in the context of investments?

Q: What are some of the career opportunities in the investment industry?

Q: Briefly explain the difference between expected returns and realized returns and between ex ante returns an ex post returns.

Q: Due to the Internet, institutional investors have gained in importance.

Q: Many Wall Street jobs tend to be cyclical in nature..

Q: Financial planners must pass a standardized test and possess certain credentials.

Q: Security analysts are typically employed only at brokerage houses.

Q: Investors unwilling to assume risk should be satisfied with the rate of inflation as their investment return.

Q: Investors enjoyed the best 5 consecutive years in the stock market history over the period 1996-2000.

Q: The minimum actual return necessary to induce investors to invest is known as the expected return.

Q: A forward contract differs from a futures contract in that:a. a forward contract is for a shorter period of time.b. a forward contract does not specify the selling price.c. a forward contract does specify the selling price.d. a forward contract is non-binding.

Q: Most futures contracts are settled by delivery.

Q: The calendar or time spread is also known as the intramarket spread, and involves contracts for two different settlement months, such as buying a March contract and selling a June contract.

Q: An organized futures exchange standardizes nonstandard forward contracts,establishing such features as contract size, delivery dates, and condition of items that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Q: U.S. Futures trading occurs in futures exchanges'trading pits.

Q: Stock-index futures may be settled either by cash or by delivery of securities.