Doubts on Equities Questions in Qbank concerning, statements, difficult

kamara5

Q 1) All else equal, a firm will have a higher PricetoEarnings (P/E) multiple if:
A) return on equity (ROE) is lower.
B) the stock’s beta is lower.
C) retention ratio is higher.
Your answer: C was incorrect. The correct answer was B) the stock’s beta is lower.

Q 2) Which of the following statements concerning the persistence of pricing anomalies is least likely to be correct?
A) When there is no theoretical explanation, an anomaly is difficult to exploit.
B) The capital required to exploit an anomaly is often not available.
C) A lack of liquidity may cause transactions costs to exceed the profit potential of the anomaly.
Your answer: A was incorrect. The correct answer was B) The capital required to exploit an anomaly is often not available.

Q 3) In a wellfunctioning securities market:
A) portfolio managers assist clients with diversifying globally to reduce systematic risk.
B) major news announcements usually coincide.
C) participants have timely information on the prices and volumes of transactions.
Your answer: B was incorrect. The correct answer was C)
My understandingeven B is correct in addition to C because
The “major news announcements usually coincide” they are generally independent

Q 4) David Farrington is an analyst at Farrington Capital Management. He is aware that many people believe that the capital markets are fully efficient. However, he is not convinced and would like to disprove this claim. Which of the following statements would support Farrington in his effort to demonstrate the limitations to fully efficient markets?
A) Processing new information entails costs and takes at least some time, so security prices are not always immediately affected.
B) Stock prices adjust to their new efficient levels within hours of the release of new information.
C) Technical analysis has been rendered useless by many academics who have shown that analyzing market trends, past volume and trading data will not lead to abnormal returns.
Your answer: C was incorrect. The correct answer was A)

Q 5) Assuming market efficiency, which of the following statements regarding technical and fundamental analysis is FALSE?
A) Evidence indicates it is possible to obtain superior returns by investing in midcap firms since they tend to be followed by fewer analysts.
B) The only way to obtain superior results using historical data is to perform a top down analysis examining first the market, then the industry and then individual firms.
C) Technical analysis that relies exclusively on historical data has no value.
Your answer: A was incorrect. The correct answer was B)

johnnyBuz

most of these questions above seem to be ok to me.

WarrenB1

yeah brah, if you messed these up, youre in for a rough time come December

Andreas42

Q 1) All else equal, a firm will have a higher PricetoEarnings (P/E) multiple if:
A) return on equity (ROE) is lower.
B) the stock’s beta is lower.
C) retention ratio is higher.
looks like two right anwers here.
ROE Low g low rg is HIGH so P/E Low
Beta Lowr low r  g is low P/E High
b is HIGH g is HIGH r  g is low P/E High (with all other factors equal).
guess it is a mistake on QBank.

Sunshine4ever

If the retention rate is higher the D/E (dividend payout ratio) would be lower in the numerator which will bring the P/E ratio down and will not increase it.
The change in the retention ratio affect both numerator and denominator.
so the correct answer is only one that is: B
thanks

ramzes

Any thoughts on other questions especially Q 3 and Q 4 and Q5

ogoluwa

3) you should have picked C right off the bat because thats a characteristic of an efficient market. For major news coinciding, I don’t really know what that means exactly. But information should be released independent and somewhat random
4) He wants to prove markets are not efficient, C would not help. A is pretty much about the theory about how the less analysts assigned to a stock the greater the chance you can spot a price inefficiency. So in this case, it may be costly to some to analyze a stock and not so much to others, which gives you a better shot at spotting a mispricing since less are analyzing it. Time is important to because you can make a move before others do.
Answer B is wrong because I don’t think its a limitation.
5) B is just wrong. Wrong wrong wrong. You might be able to argue C or A . but B should have stuck out like a sore thumb

hardwork24

Okay guys, as per my understanding B is correct.
1. A is incorrect, because, if ROE goes down, means E (Earnings) goes down, market would bid the Price down accordingly, so that P/E does not change or atleast does not go higher.
2. C is incorrect, because it will take P/E lower and not higher, as all of you have already pointed out.
3. B is correct, because, if Beta of a company goes down, its cost of equity will also go down. Correct? (use CAPM equation to explain this). Now, coming back to DDM to calculate P/E, for a reduced k, P/E will go higher.

svgleeson

rus1bus, Im not sure which order are u exaplning the answer, if u dont mind can u pls select the option and corresponding question number
Sorry For the trouble

dirk01

Oh sorry for the confusion. I didnt realize that. Here it is again Varun.
1. A is incorrect, because, if ROE goes down, means E (Earnings) goes down, market would bid the Price down accordingly, so that P/E does not change or atleast does not go higher.
2. B is Correct, because, if Beta of a company goes down, its cost of equity will also go down. Correct? (use CAPM equation to explain this). Now, coming back to DDM to calculate P/E, for a reduced k, P/E will go higher.
3. C is incorrect, because it will take P/E lower and not higher, as all of you have already pointed out.