Chapter 3
INDIRECT INVESTING
Multiple Choice Questions
Investing Indirectly
1. Which of the following is not a characteristic of investments companies?
a. pooled investing b. diversification c. managed portfolios d. reduced expenses
2. In order to avoid paying income taxes, an investment company must:
a. be classified as a non-profit organization b. invest only in municipal bonds. c. pass on interest, dividends, and capital gains to the stockholders. d. be registered as a closed-end investment company.
3. Investment companies must register with the SEC under the provisions of the:
a. Securities Act of 1933 b. Securities Exchange Act of 1934
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d. All of the above are true.
16. If a mutual fund holds a substantial amount of Treasury bills, this is probably a(an):
a. tax-exempt fund. b. conservative bond fund. c. income fund d. money market mutual fund.
17. Which of the following is true regarding value funds and growth funds?
a. Value funds seek stocks that are cheap by fundamental standards while growth funds seek stocks with high current earnings. b. Growth funds typically outperform value funds. c. Value funds and growth funds tend to perform well at different times. d. All of the above are true.
18. In general, index funds:
a. are higher risk than other funds. b. are traded on the exchanges. c. have lower expenses than other funds. d. all of the above.
The Mechanics of Investing Indirectly
19. Net asset value takes into account:
a. both realized and unrealized capital gains. b. only realized capital gains. c. only unrealized capital gains. d. neither realized or unrealized capital gains.
20. If NAV > market price of a fund, then the fund:
a. is selling at a discount. b. is selling at a premium. c. is an index fund. d. is an ETF.
21. Mutual funds may be affiliated with an underwriter. This means:
a. the underwriter
Absent information about investors’ earnings quality concerns, it is likely to be the case that most of the variation in P/E ratios is due to differences in growth opportunities and (to a lesser extent) risk.
• Managed growth or capital growth funds—structured to maximise the return from capital growth, that is, an appreciation in the value of the assets held. Less emphasis on income receipts. Higher risk profiles within an investment portfolio; therefore, will usually hold a higher percentage of funds in equity investments and a much smaller portfolio of fixed interest investments.
Davo Corp Ltd is a large investment company, which has investments in two of the following industries:
The good news is that both investment styles go through periods when they outperform, so your natural inclination will be in favor at least some of the time. Understanding whether you are a growth or a value investor by preference is critical to investment happiness. It is impossible to get a value investor excited about high-priced, high-growth investments, just as it is impossible to get a growth investor excited about a company that to them looks half dead. The key is style.
Growth investors believe that the securities are above average earnings growth on the other hand, value stocks believe that the stocks are undervalued due to fallen out of favor in market place. Although, REIT invests
Burnes, Inc. is a mature firm that is growing at a constant rate of 5.5 percent per year. The firm’s last dividend was $1.50. If the required rate of return is 12 percent, what is the market value of this stock assuming dividend growth equals the growth rate of the firm?
A. accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest
These changes in prices imply the power of growth rate’s assumption over stock price because “It was growth that drew attention to the brand. It was growth that propelled the stock offering. It was growth that drove the stock price to ever greater heights.” When the growth rate is expected to increase significantly, value of the firm is increased tremendously and so is its stock price. Both the enterprise value of the firm and its stock price change in the same direction with the change in growth rate estimates.
Value investing is a way of investing in company stocks that are considered either undervalued or out-of-favor by the market. In other word, a value investment is one where the intrinsic value of the stock is not accurately reflected in the current market valuation. The underlying reason of too much decreasing in the stock price is that the company may be losing market shares or even in trouble due to market’s panic attributed to negative rumors as well as having management problems. Since the market price
Value investing is a way of investing in company stocks that are considered either undervalued or out-of-favor by the market. In other word, a value investment is one where the intrinsic value of the stock is not accurately reflected in the current market valuation. The underlying reason of too much decreasing in the stock price is that the company may be losing market shares or even in trouble due to market’s panic attributed to negative rumors as well as having management problems. Since the market price has dramatically descended, the book to market
(a) Fama and French argued that value stocks outperformed growth stocks because they were risker. The outperformance is explained by the excess risk that value stocks face as a result of their higher cost of capital and greater business risk.
The case of the Investment Detective laid out the cash flows for us in each of eight different projects. Before doing any calculations we came up with the assumption that we could not rank the projects simply by inspecting the cash flows.
Equity-fund managers usually use one of three particular styles of stock picking when they make investment decisions for their portfolios. First there is value, where a fund manager uses a value approach search for stocks that are undervalued when compared to other similar companies. Next, there is growth and those funds try to find stocks that are growing faster than their competitors, or the market as a whole. These are often the stocks of well-known established corporations. There is blend where managers buy both kinds of stocks, building a portfolio of both growth and value stocks.
So the investor will invest 32.58860806% of the investment budget in the risky asset and 67.41139194% in the risk-free asset.
Personal investment is defined as an individual invest and manage their own financial instrument, such as, stocks, bonds, property and others. This personal investment is in aims of improve the liquidity and efficiency of the equity and capital of the individual. Basically, the individual investors have to develop their own investment plan and framework based on different characteristics of the individual investors. This is because the personal investment is very subjective, whereby it is totally based on the characteristics and the degree of risk tolerance of the individual investors. However, before investing into the financial instruments, the individual investors should develop an investment plan and strategy. This