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Q6. Which of the following is NOT one of the three steps in the top-down approach to security valuation? fficeffice" />

A)   Market analysis.

B)   Product analysis.

C)   Company analysis.

Correct answer is B)        

The other three choices comprise the steps of the top-down approach, or fundamental analysis.

 

Q7. In the top-down approach to valuation, industry analysis should be conducted before company analysis because:

A)   an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform.

B)   most valuation models recommend the use of industry-wide average required returns, rather than individual returns.

C)   the goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest P/E ratios.

Correct answer is A)        

In general, an industry’s prospects within the global business environment determine how well or poorly individual firms in the industry do. Thus, industry analysis should precede company analysis. The goal is to find the best companies in the most promising industries; even the best company in a weak industry is not likely to perform well.

 

Q8. Deciding how to allocate investment funds, first among countries, and then within countries to various asset classes, is the objective of which step of the top-down valuation approach?

A)   Analysis of general economic influences.

B)   Sector analysis.

C)   Analysis of industry influences.

Correct answer is A)        

The objective of step one, economic analysis, is to allocate your portfolio among countries and asset classes based on your analysis of future economic conditions.

 

Q9. Which of the following is NOT typically regarded as a component of the risk premium portion of the required rate of return “k”?

A)   Country risk.

B)   Inflation risk.

C)   Exchange rate risk.

Correct answer is B)

The risk premium can be broken down into internal and external factors:

§   Internal sources of risk (diversifiable): business risk, financial risk, liquidity risk, exchange-rate risk, and country risk.

§   External sources of risk: market risk (non-diversifiable).

 

Q10. Which of the following would NOT be a reason for market, industry, and company analysis?

A)   Single industries perform consistently over time.

B)   The market is generally a very important component of security returns.

C)   Firms within a given industry perform differently.

Correct answer is A)

The second step in the top-down, three-step valuation process is to identify those industries that will prosper or suffer during the time frame of your economic forecast.  You should consider the cyclical nature of the industry under study.  Some industries are cyclical, some are contra-cyclical and some are non-cyclical.  Finally, your analysis should also account for foreign economic shifts.  In general, an industry’s prospects within the global business environment determine how well or poorly individual firms in the industry do.  Thus, industry analysis should precede company analysis.

 

Q11. If the federal government wanted to expand economic growth, it would promote policies that:

A)   reduce federal subsidies.

B)   raise taxes.

C)   reduce taxes.

Correct answer is C)

In theory, tax cuts lead to more spending which leads to economic growth.

 

Q12. When the Federal Reserve raises the bank lending rate, which of the following occur in the short run?

A)   The availability of funds declines and costs increase.

B)   The availability of funds declines and costs decline.

C)   Costs decline and interest rates rise.

Correct answer is A)

Increases in interest rates by the Fed is considered a restrictive economy policy. It is attempting to limit the availability of funds, causing interest rates and costs to rise.