Financial Services 400 Test 2.1

Front 1

Practitioners of contrarian investment strategies profit if they are able to withstand peer group pressure to "buy greed" and "sell fear."

Back 1

False

Front 2

By themselves, low stock prices do not necessarily signal attractive value.

Back 2

True

Front 3

According to Benjamin Graham, the true measure of stock market values comes from price movements and not from earnings, dividends, future prospects and asset values.

Back 3

False

Front 4

According to Graham and Dodd, intrinsic values and current market prices rarely coincide given the effects.

Back 4

True

Front 5

The implicit margin of safety is small when a low price is paid for a company with robust growth prospects.

Back 5

False

Front 6

Dividends have represented an important part of total return.

Back 6

True

Front 7

Value investors like to buy stocks that sell above their economic value.

Back 7

False

Front 8

Valuing preferred stock is a special case of the constant growth model where the growth rate is assumed to be consistently greater than zero

Back 8

False

Front 9

Future stock prices can be estimated with a P/E ratio, EPS, and an earnings growth rate.

Back 9

True

Front 10

Computing several different possible fundamental values using different growth rates is called sensitivity analysis.

Back 10

True

Front 11

The margin-of-safety principle refers to keeping extra cash in the investment portfolio.

Back 11

False

Front 12

Liquidation value refers to the value of the firm measured by the price of the assets when sold.

Back 12

True

Front 13

Low price to sale ratio firms are considered value firms.

Back 13

True

Front 14

Value investors prefer firms with a Value of ROE less then one.

Back 14

False

Front 15

Regression to the mean theory suggests that highly profitable firms will continue to be highly profitable

Back 15

False

Front 16

Equity-income investors prefer to buy stocks with high dividend yields.

Back 16

True

Front 17

CAPM is a tool to help investors isolate instances in which the pricing of individual securities deviates from that predicted for a perfectly efficient capital market.

Back 17

True

Front 18

An important assumption of the CAPM is that all investors have the opportunity to lend or borrow at the risk-free rate.

Back 18

True

Front 19

The Security Market Line depicts a straight-line relation between the expected rate of return on a portfolio and the standard deviation of portfolio returns.

Back 19

False

Front 20

The security market line shows how the expected rate of return can be seen as a simple function of systematic risk.

Back 20

True

Front 21

The security market line posits a simple straight-line relation between the expected rate of return on a mutual fund portfolio and systematic risk

Back 21

True

Front 22

Because unsystematic risk cannot be eliminated through diversification, investors must be rewarded for any increase in unsystematic risk to justify their investment in a particular stock or market sector.

Back 22

False

Front 23

Systematic risk is the amount of unavoidable volatility that is directly tied to the overall market.

Back 23

True

Front 24

If Beta = 1.5, then a 2% boost in the stock would lead to a 3% jump in the market.

Back 24

False

Front 25

The beta of a portfolio is the weighted average of the beta's of the individual securities, where the weights are proportions of how much of the portfolio is made up of each security.

Back 25

True.

Front 26

You can proxy for the market portfolio using the S&P 500 Index, the DJIA, or the Nasdaq Composite without differences in beta estimates.

Back 26

False

Front 27

Estimates of a firm's beta remain constant over time.

Back 27

False

Front 28

Fama-French's HML factor is useful because it uses the P/E ratio, which has some predictability power.

Back 28

False

Front 29

When a portfolio has a positive alpha, it suggests that the manager earned higher returns than expected, given the level of risk taken.

Back 29

True

Front 30

The Sharpe ratio can be used to provide a ranking of portfolios by the risk premium earned per unit of systematic risk.

Back 30

False

Front 31

An increase in the Treynor measure is preferred by all investors, regardless of risk preferences.

Back 31

True