FINC-5210 Exam #2. Please select the BEST answer for each of the following questions. Each question is worth three (3) points, for a total of 100 points.
1. There is considerable debate between individuals who believe in either fundamental analysis or technical analysis. Which of the following statements is true regarding these two approaches?
a. They both use historical information to try to forecast the future.
b. They are separate and incompatible approaches for stock price analysis.
c. Fundamental analysis is a much older, traditional, and reliable approach than technical analysis.
d. All of the above are true.
e. None of the above are true.
2. Which of the following would probably NOT be used by a practitioner of technical analysis?
a. Historical price and volume data.
b. Stock charts.
c. Support and resistance levels.
d. Aggregate market data, such as the advance-decline line.
e. Company earnings reports.
3. The efficient market hypothesis tell us:
a. That all relevant information is already factored into the price of a stock.
b. That it is not possible to consistently “beat the market”.
c. That the market’s actions are really not possible to forecast.
d. All of the above.
e. Only a. and c.
4. Which of the following is NOT true regarding Dow Theory?
a. Stock prices move in trends which can be identified in the long term.
b. Daily price action is of no real importance.
c. A trend is confirmed when the major indexes are both moving in the same direction.
d. It provided much of the foundation of contemporary fundamental analysis.
e. All of the above are true.
5. Using diversification properly:
a. Can reduce the overall risk in a stock portfolio.
b. Can essentially eliminate the risk in a stock portfolio.
c. Means investing in a number of different stocks.
d. Only a. and c.
e. Only b. and c.
6. A national crisis involving all sectors of the economy will have what effect on the stocks in a portfolio?
a. Unsystematic risk
b. Systematic risk
c. No effect
d. Portfolio risk
e. Risk premium
7. If the price of oil were to suddenly rise significantly, what would we call the effect of this event upon the air transportation stocks in a portfolio?
a. Unsystematic risk
b. Systematic risk
c. Portfolio risk
d. Risk premium
e. None of the above
8. The “beta” coefficient:
a. Is a measure of the risk of a stock.
b. Compares the movement and volatility of a stock to the market as a whole.
c. Measures systematic risk.
d. All of the above.
e. Only a. and b.
9. Which of the following can be used to determine the degree to which a portfolio is “beating” the market?
a. The beta coefficient
b. Sharpe ratio
c. Jensen’s alpha
d. The risk premium
e. None of the above
10. Which of the following determines your profit or loss on any one trade?
a. Investment psychology
b. Money management
c. Method
d. All of the above
e. Only a. and b.
11. Which of the following tells you when to buy shares of a stock?
a. Investment psychology.
b. Money management.
c. Method.
d. All of the above.
e. Only b. and c.
12. Which of the following tells you when to sell shares of a stock which you currently own?
a. Investment psychology.
b. Money management.
c. Method.
d. All of the above.
e. Only b. and c.
13. Joe is an investor who looks for companies whose stocks are currently selling at prices which represent historically low prices in relation to company earnings and revenues. In addition, he prides himself as someone who likes to do the opposite of what the investment “crowd” is doing. Which of the following best describes Joe’s investment style?
a. Growth
b. Value
c. Contrarian
d. Only a. and c.
e. Only b. and c.
14. Mary is an investor who buys the stocks of companies which are currently reporting increases in revenues and earnings. Which of the following best describes Mary’s investment style?
a. Value
b. Momentum
c. Technical
d. Contrarian
e. None of the above.
15. Jim is an investor who uses a variation of the “Dogs of the Dow” approach. He maintains a portfolio with five equal-sized positions. Each year, he closes out all of his current positions and buys the stocks of the five companies in the Dow Jones Industrial Average with the highest dividend yield. Which of the following best describes Joe’s investment style?
a. Growth
b. Value
c. Momentum
d. Mechanical
e. None of the above.
16. Susan is an investor who uses a moving average method to time her stock purchases, assuming that as long as the moving average is sloping upward, the stock will continue moving up in price with enough strength to produce a significant increase in price. Which of the following best describes Susan’s investment style?
a. Value
b. Growth
c. Momentum
d. Contrarian
e. None of the above.
17. Which of the following is a good approach to test an investment method?
a. Back-test it manually using historical data from the past few years.
b. Paper-trade it manually using current data.
c. Back-test it using a computerized testing system.
d. All of the above.
e. Only a. and c.
18. Which of the following statements is NOT true regarding stock price movement?
a. A stock’s price is determined by the buying and selling pressures of the market players.
b. The prices of stocks in a single industry group tend to move together in the same direction.
c. The prices of stocks in a single sector of the economy tend to move together in the same direction.
d. Stock prices move in trends, either up, down, or sideways.
e. All of the above are true.
19. Which of the following statements is true regarding stock price trends?
a. A trend will tend to go further and last longer than we might think.
b. Stock prices are in uptrends or downtrends about half of the time, and not in trends the other half of the time.
c. The trend of a stock’s price depends on your timeframe.
d. All of the above.
e. Only a. and b.
20. Which of the following would NOT be a good starting point for selecting and/or creating a personalized investment method?
a. Read interviews with successful investors, looking for a method which you like.
b. Find a method which has worked in the past, study it in detail, and tailor it to your personality.
c. Study the stock market, develop your own theories, and develop a method from scratch.
d. Try several different methods, using back-testing and paper-trading, and look for one which you like.
e. Actually, all of these are good starting points for developing an investment method.
21. Which of the following is NOT a good way to overcome harmful emotions which can get in the way of investing success?
a. Find a successful investor and adopt his/her method.
b. Test your method thoroughly and come to trust it.
c. Make sure your method fits with your personality.
d. Have clear-cut rules for entering and exiting positions.
e. Stop investing, move all of your account into cash, and reflect on yourself and the market for a few weeks.
22. Which of the following statements is NOT true regarding the concept of diversification of your investment account?
a. Under-diversification increases risk.
b. Over-diversification reduces potential returns.
c. In a small account (less than about $5,000 or so), it would be acceptable to invest in as few as three stocks.
d. In a small account (less than about $5,000 or so), it would be acceptable to invest in a single index mutual fund.
e. All of the above statements are true.
23. You have just completed a detailed evaluation of the economic cycle, using a variety of indicators. Your analysis tells you that the economy is very likely in an early expansion stage. Based on this analysis, the stock of which of the following companies should, in theory, be ready for an increase in price?
a. Ryland Group (RYL)
b. Sara Lee (SLE)
c. Southern Company (SO)
d. Dell (DELL)
e. Merck (MRK)
24. In another analysis of the economy, you find the following: (1) average overtime hours worked are at a high point; (2) interest rates are moving up; (3) unemployment claims have been moving down for quite a while; (4) personal income has been moving up for quite a while; (5) manufacturing sales have moved up well above the prior low point; (6) manufacturers’ inventories are moving up toward a high point. What is the most likely stage of the economy, given these indications?
a. recession
b. expansion
c. exhaustion
d. contraction
e. It is impossible to tell given this data.
25. Assume the market indexes have been moving up for the past several weeks. However, you notice that the number of stocks making new highs on the indexes is not moving up, and the volume of advancing stocks is also not moving up. What does this mean?
a. The current advance is potentially too weak to continue.
b. This is a sign of a divergence between the internals of the market and the market index.
c. The criteria of the Dow Theory have not yet been met.
d. All of the above.
e. Only a. and b.
26. Pfizer (PFE) is a member of which market sector?
a. Technology
b. Consumer Durables (Cyclicals)
c. Consumer Non-Durables (Staples)
d. Financial
e. Healthcare
27. Which of the following has been proven to be the most reliable indication of the economic cycle?
a. Personal income.
b. The economic leading indicators.
c. The stock market indexes.
d. The direction of interest rates.
e. Consumer confidence.
28. In general, money management is responsible for which of the following?
a. Controlling losses
b. Managing profits
c. Determining how many and what size positions you will manage
d. All of the above
e. Only a. and b.
29. Which of the following approaches is an example of a rule in your investment method?
a. Sell a stock you currently own when the price reaches a certain level.
b. Sell a stock you currently own by locking in a certain percentage of the profit.
c. Sell a stock you currently own when the price drops below a trend line.
d. All of the above.
e. None of the above.
30. Which of the following is NOT true regarding the psychology of the investment “crowd”?
a. The crowd is typically correct during the middle portion of a market trend.
b. The crowd is typically incorrect during the late portion of a market trend.
c. The crowd is typically incorrect during the early portion of a market trend.
d. The emotions of the crowd are generally more complicated than the emotions of each individual in the crowd.
e. Market price movement is a result of the emotions and psychology of the investment crowd..
31. You want to find out more about the financial and other fundamental characteristics of a company before deciding whether to buy its stock. Which of the following web sites will provide the information you’re seeking?
a. www.stockcharts.com
b. www.marketguide.com
c. investor.msn.com
d. All of the above
e. Only b. and c.
32. Your broker has recommended that you consider buying shares of Lowe’s (LOW), based on the company’s new marketing campaign and plans for expansion. What must you do before deciding?
a. It depends on your method.
b. Perform your own price ratio analysis to project a share price for LOW and make your own decision.
c. Look at the chart for LOW.
d. All of the above.
e. Only b. and c.
33. Assume the financial news has been negative for months, forecasting no end to an extended bear market. You find that individual investors have started selling their mutual funds, converting them to cash, in record numbers. The non-financial magazines are starting to publish cover stories about “the end of the stock market.” And the market indexes are at their lowest point in two years. Which of the following statements is true regarding how a specific investor might interpret this news?
a. A trend-following investor will continue holding short positions until he/she sees evidence that the downtrend is over.
b. A contrarian investor will see this as a potential buying opportunity.
c. A value investor will consider buying stocks whose current prices are well below the price levels projected using price ratio analysis.
d. All of the above.
e. Only a. and b.