The emotional, undisciplined client is likely to sell at market lows.
True
An emotional client is likely to get discouraged during bear markets and sell at market lows.
An error made by some stock investors is having an inadequate time horizon.
True
Stocks are volatile and often require a long-term time horizon to fulfill their investment potential.
Only value investors are concerned about investment time horizons.
False
Both growth and value investors must provide adequate time for their investments to grow, especially with stocks.
Investors with unrealistic expectations tend to underestimate risk.
True
Investors with unrealistic expectations focus on attaining an inflated rate of return while giving too little attention to risk.
One mistake that investors typically make is not sticking to their investment strategy.
True
The emotional, undisciplined client often makes the mistake of straying from his or her investment strategy.
Chasing performance is common with the emotional client.
True
The emotional client tends to chase performance and rates, buying securities that have had high returns recently, hoping to also obtain those higher returns, even though he or she may be buying after big gains in the securities have already occurred.
Which of the following is a requirement of strategy?
an identifiable goal
a method to attain that goal
the competencies and resources to sustain the strategy
all of the above
all of the above
The requirements of a strategy include an identifiable goal, a method to attain that goal, and the competencies and resources to sustain the strategy.
Investment strategy supersedes investment policy.
False
Investment strategy operates within the framework set by investment policy.
Strategy provides a systematic method of moving toward a goal.
True
Strategy focuses our attention and energies on actions that systematically move us closer to a goal.
One key element of strategy is to have the resources to sustain the strategy.
True
Strategy must have both the competencies and resources to sustain the strategy.
There is usually only one proper investment strategy for a client.
False
There are usually several investment strategies a client might use.
Dollar cost averaging works in markets with a long-term upward bias.
True
Dollar cost averaging, which involves buying more shares when the market is low, works in markets with a long-term upward bias.
Value averaging incorporates which one of the following?
equal dollar amount purchases
variable periodic transactions
regular purchases and, sometimes, sales
regular purchases and, sometimes, sales
Unlike dollar cost averaging, value averaging can require sales as well as purchases, but these transactions are done on a regular basis.
Consumer staples (foods, pharmaceuticals, liquor) are relatively unaffected by the economic cycle.
True
False
True
Consumer staples (foods, pharmaceuticals, liquor) are good investments during a recession because they are relatively unaffected by the economic cycle.
Dollar-cost averaging results in sometimes buying more shares when prices are higher.
True
False
False
By investing a fixed dollar amount each period, an investor using dollar-cost averaging will buy fewer shares when prices are higher.
An investor using the dollar-cost averaging approach is almost sure to make money in the long run.
False
An investor using the dollar-cost averaging approach will not make money if the investment goes down and stays down.
Like dollar-cost averaging, a value averaging approach requires continual, periodic purchases over a set time frame.
False
Like dollar-cost averaging, a value averaging approach requires purchases to be made over a set time period (such as the first of each month), but, unlike dollar cost averaging, it can also require sales when the increase in periodic value is greate
Dollar-cost averaging is a good strategy for individuals who like to time the market.
False
Dollar-cost averaging is a good strategy for individuals who do not want to time the market because purchases are made without trying to decide whether the market is "high" or "low.
From a contrarian's point of view, an increase in short selling is a bullish indicator.
True
False
True
An increase in short selling indicates a growing herd consensus that the market will decline, so a contrarian would view this as a bullish indicator.
Research suggests that the low P/E approach is a valid investment strategy.
True
Studies have concluded that the low P/E approach outperforms growth stocks during bear markets.
A contrarian investor would interpret information that revealed that most investment advisers are bullish as a sell signal.
True
If most investment advisers are bullish, a contrarian would interpret this as a bearish signal, and therefore as a sell signal.
During periods of uncertainty, individuals tend to avoid opinions that differ greatly from those of their peers.
True
During periods of uncertainty, individuals tend to modify their opinions to match more closely with those of their peers.
The low P/E approach suggests that many stocks trade at a low P/E because they (or their industry) are currently in vogue.
False
The low P/E approach suggests that many stocks trade at a low P/E because they (or their industry) are currently out of favor.
Benjamin Graham's style of investing could be described as which one of the following?
top-down
bottom-up
independent
bottom-up
Graham's style of investing is analyzing the company and therefore is strictly bottom-up.
Graham's value formula incorporates which one of the following bond 20-year corporate yields?
yield for A-rated bonds
yield for AA-rated bonds
yield for AAA-rated bonds
yield for AAA-rated bonds
Graham's formula incorporates the current yield for AAA-rated bonds.
Benjamin Graham stressed that dividends had an unimportant role in selecting stocks.
True
False
False
Graham considered dividends important as a measure of value and as a return that could be earned while waiting for the market to recognize the value of a stock.
The Graham value formula incorporates the company's anticipated five-year earnings growth.
True
Part of the Graham value formula multiplies the anticipated five-year earnings growth by 2.
One of T. Rowe Price's guidelines regarding growth stocks is that the company should have low total labor costs but well-compensated employees.
True
Regarding growth stocks, one of T. Rowe Price's rules was that the company should have low total labor costs but well-compensated employees.
One indication of a growth stock is a high beta.
True
A high beta is indicative of a growth stock.
A standard for growth stocks is earnings-per-share growth of 10% or more.
False
A standard for growth stocks is earnings-per-share growth of 15% or more.
Growth stocks typically have high price-to-book value ratios.
True
One measure of growth stocks is that their price-to-book value ratios are usually high.
In the development stage of a new firm, financial losses are typical.
...
Evidence exists that growth stocks generally outperform value stocks over 10-year periods.
...
An investor in small stocks should have a long time horizon (three to five years).
True
An investor in small stocks should have a long time horizon (three to five years), because it can take time for the potential of small stocks to be realized.
A small stock strategy is appropriate for an investor with a lower risk tolerance.
False
A small stock strategy is appropriate for an investor with a higher risk tolerance.
According to Gerald Perritt, which one of the following is not a correct guideline for investing in small stocks?
acquire 10 to 15 different stocks
acquire shares over time
avoid portfolio turnover above 30%
acquire 10 to 15 different stocks
When investing in small stocks, Perritt recommends diversifying with 20 to 30 stocks.
The small firm effect demonstrates that, on a risk-adjusted basis, small-cap stocks provide more return than large-cap stocks.
True
Studies made of returns from small firms demonstrate that, on a risk-adjusted basis, small-cap stocks provide more return than large-cap stocks. This is referred to as the "small firm" effect.
When investing in small companies, the investor should have a one- to three-year time horizon.
False
When investing in small companies, the investor should have a three- to five-year time horizon.
One reason to use an active money management strategy is that a client will feel involved in the investing process.
True
When using an active money management strategy, a client feels like he or she is a participant in the investment process.
Passive investing has lower costs associated with it than active investing.
True
Passive investing does not require the costs of analysts and portfolio managers and, therefore, costs less than active investing.
One reason to use active investment management involves the potential for increased returns.
True
Active investment management provides the possibility of higher returns than from a passive (indexed) approach.
A ladder strategy tries to add value by timing the bond market.
False
A ladder strategy avoids timing the bond market by simply setting up staggered maturities and holding each issue until it matures.
The essence of a barbell strategy is to blend short-term and long-term bonds to provide an overall stream of income acceptable to the client.
True
A barbell strategy blends short-term and long-term bonds to provide an overall stream of income acceptable to the client.
A substitution swap takes advantage of mispricing in bonds.
True
A substitution swap exchanges one bond for another very similar bond to obtain more yield (a better price) due to a simple mispricing of the two bonds.
The main objective of a tax swap is to increase income.
False
The main objective of a tax swap is to generate capital losses that can be used to save on taxes.
A ladder strategy involves buying bonds with maturities that provide the best risk/return relationship.
False
A ladder strategy involves buying bonds with staggered maturities that provide a reasonable blend of yields over time; this strategy does not try to assess the best risk/return relationship.
A barbell strategy staggers short-term maturities and long-term maturities in a portfolio.
True
As the name suggests, a barbell strategy structures a bond portfolio by staggering short-term bonds and long-term bonds.
One benefit of a buy-and-hold strategy is that capital gains taxes on unrealized profits are deferred.
True
By using a buy-and-hold strategy, capital gains taxes on unrealized profits are deferred until the securities are sold.
The buy-and-hold strategy serves as a benchmark strategy against which other strategies can be compared.
True
The buy-and-hold strategy is a benchmark strategy against which other strategies can be compared because those other strategies involve some changes or specific parameters by which to buy stocks. The success of these strategies can be determined by w
Buying stocks and keeping them is considered an active strategy.
False
A buy-and-hold strategy is a passive strategy, because it does not require active investment management.