MaxMarkCh06QuestionsOnly.docx

MaxMarkCh06QuestionsOnly.docx

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MaxMarkCh06QuestionsOnly

MenuItem6:

（Topic6）Investorsinthesharemarket

Question1:

Therisksfacedbyinvestorsinsharescanbedividedintotwocategories:

systematicriskandunsystematicrisk.Whichofthefollowingisasourceofsystematicrisk?

A:

changesintheinterestrateon10-yearbonds

B:

variationsinproductivityatacompany’smainfactory

C:

changesinthecostofspecialisedlabour

D:

changesintheeffectivenessofacompany’smanagers

Feedback:

Changesininterestrateswillaffectthemarketasawholeandare,therefore,asourceofsystematicrisk.ThefactorsmentionedinBandDwouldonlyaffectreturnsforanindividualcompany;while,forCtheeffectswouldbeconfinedtoasmallnumberofcompanies,soB,CandDareallsourcesofunsystematicrisk.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,Section6.1,p.249.

Withinthecontextofinvestinginshareslistedonastockexchange,riskcanbecategorisedas

（1）systematic,and

（2）unsystematic.Systematicrisksarethoseriskexposuresthatwillhaveanimpactonsharepricesgenerallyinthemarket.Themajorityofshareslistedonaparticularstockexchangewillbeaffectedtoalesserorgreaterdegree.Theimpactmaybepositiveornegative.Examplesofsystematicriskexposuresinclude:

∙changesininterestrates

∙changesinexchangerates

∙contractionorexpansionineconomicactivity

∙introductionofnewlegislation

∙politicalstability

∙changesinmarketconfidenceandperception.

Question2:

Therisksfacedbyinvestorsinsharescanbedividedintotwocategories:

systematicriskandunsystematicrisk.Whichofthefollowingisasourceofunsystematicrisk?

A:

anincreaseinthecompanytaxrate

B:

achangeinthevalueoftheAustraliandollar

C:

replacementofacompany’schiefexecutive

D:

theoccurrenceofawidespreaddrought

Feedback:

Replacementofachiefexecutiveisacompany-specificeventandis,therefore,asourceofunsystematicrisk.ThefactorslistedinA,BandDwouldhavemarket-wideeffects.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,Section6.1,p.249.

Ontheotherhand,unsystematicriskaffectsasinglecorporationorasmallgroupofcompanies.Examplesofunsystematicriskexposuresthatwillhaveanimpactonacorporationinclude:

∙theresignationofanexecutivemanager

∙achangeinfutureperformanceforecasts

∙thefailureoftechnologyorcommunicationsystems

∙dissentwithintheboardofdirectors

∙rumourorevidenceoffinancialdifficulty.

Question3:

Liquidityinastockmarketisimportanttoinvestorsbecauseifamarketisliquid:

A:

therearemanylistedsecuritiestochoosefrom

B:

thesecuritieslistedarelessriskythanunlistedinvestments

C:

investorscangenerallybuyorsellsharesatthecurrentmarketprice

D:

brokeragecostsarelow

Feedback:

Amarketisregardedasliquidiftherearemanybuyersandsellerspresentinthemarket.UnderthesecircumstancesalargeordertobuyorsellcanbeexecutedwithlittleornoeffectonthemarketpricesoCiscorrect.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,p.246.

Liquidityisattractivetoinvestorsinastockmarketbecausetheyknowthatinmostcircumstancestheyareabletobuyandsellsharesatthecurrentmarketprice.Thismeansthattheycanbuyandselllong-term,higher-risksecuritiesandatthesametimemaintainliquidityintheirinvestmentportfolio.Astockexchangemeasuresliquidityasthevolumeoftradingrelativetothesizeofthemarket.

Question4:

Investorsareoftenadvisedtoholdadiversifiedportfolio.Whichofthefollowingportfoliosoffersthegreatestdiversification?

A:

sharesintendifferentbanks

B:

tenstocksfromdifferentindustries

C:

equalproportionsofAustralianshares,bondsandinternationalshares

D:

sharesin25companiesthatwereselectedatrandom

Feedback:

Diversificationismoreeffectivewhenthecorrelationbetweenreturnsonsecuritiesislow.Forashareportfolio,effectivediversificationrequiresaspreadofcompaniesfromdifferentindustries.Greaterriskreductionwillbeachievedbyincludingotherassetclassessuchasbonds,propertyandinternationalshares.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,p.249.

Investmentchoicesavailablethroughshareslistedonastockexchangeenableaninvestortodiversifyawaymostoftheunsystematicrisk.Investmenttheorycontendsthatbyholdingadiversifiedinvestmentportfolioaninvestorisabletominimisetheriskexposuresassociatedwithinvestinginasingleshare.Adiversifiedinvestmentportfoliowouldincludearangeofinvestmentcategories,includingshares,fixed-interestsecuritiesandproperty.Thesharecomponentofaninvestmentportfoliowouldholdarangeofsharesacrossdifferentindustrygroupings.Itisgenerallyagreedthatadiversifiedshareportfoliowillincludesomewherebetweentenandtwenty-fivestocks.

Question5:

Investmentsmaybemanagedactivelyorpassively.Anactiveinvestmentapproachmaybemostaccuratelydescribedas:

A:

tradingfrequentlyonanintra-daybasisaspriceschange

B:

investinginshareswithhighbetas

C:

usingtechnicalanalysistoguidetradingdecisions

D:

attemptingtoachievesuperiorreturnsthroughsuccessfulstockselection

Feedback:

Anactiveinvestorinshareswillstructureaportfolioofsharesthatareexpectedtoprovidehigherreturnsthanothersandwillthenbuyandsellsharesasnewinformationbecomesavailable.Activeinvestmentdoesnotneedtoinvolveintra-daytradingorinvestingonlyinshareswithhighbetas,soAandBareincorrect.Whileanactiveinvestormayusetechnicalanalysis,itisnottheonlytechniquethatsuchinvestorsrelyon,soCisalsoincorrect.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,pp.249–250.

Investorsinthesharemarketmustalsodecidewhethertotakeanactiveorpassiveinvestmentapproach.Activeinvestmentinvolvesaninvestormakingstrategicstockselectionstostructureashareportfolio.Anactiveinvestorwillbuyandsellsharesbasedonnewinformationreceivedandchangesinpersonalriskandreturnpreferences.Twoactiveinvestmentapproaches,fundamentalanalysisandtechnicalanalysis,arediscussedindetailinChapter7.Eachoftheseapproacheswillinfluencethestructureandcompositionofaninvestmentshareportfolio.

Question6:

Whichofthefollowingstatementsaboutfundamentalanalysisandtechnicalanalysisiscorrect?

A:

technicalanalysisfocusesonidentifyingtrendsinmarketindicesratherthaninthepricesofindividualshares

B:

technicalanalysisisregardedasapassiveinvestmentapproach

C:

fundamentalanalysisreliessolelyonanalysisofacompany’sfinancialstatements

D:

technicalanalysisreliesheavilyonanalysisofsharepricedatawhereasfundamentalanalysisreliesonabroadersetofinformation

Feedback:

Technicalanalysisaimstofindandinterpretpatternsinpastsharepricedata.Fundamentalanalysisaimstofindmispricedsecuritiesbyanalysisoftheoutlookforacompany’sbusinessso,consistentwithD,itusesmuchmoreinformationthantechnicalanalysis.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,p.250.

Briefly,technicalanalysisconsiderstrendsthatareevidentovertimeinindividualsharepricesorgroupsofshareprices,asrepresentedinshare-marketindices.Technicalanalystscontendthathistory,ormarketbehaviour,willberepeatedfromtimetotime.Therefore,ifanemergingsharepricetrendcorrespondstoapastpricetrend,thereisanexpectationthatcurrentsharepriceswillreactastheydidpreviously.Sharepricetrendsareplottedongraphsusingarangeofquantitativetechniques,suchascalculatingathirty-daymovingaverageofpricemovements.

Thefundamentalanalysisapproach,ontheotherhand,considersthefinancialperformanceofacorporation.Thisinvolvestheanalysisoffinancialandaccountingratiossuchasthereturnonequity,thedebt-to-equityratio,thedebt-servicingcapacityandliquidity.Fundamentalanalysisalsoconsiderseconomicfundamentalsthatwillhaveanimpactontheperformanceofacorporationorthesharemarketgenerally.Examplesofeconomicfundamentalsincludeproductivitylevels,employmentlevels,thebusinesscycleandfiscalandmonetarypolicies.

Question7:

Toundertakedirectinvestment,thefirststeptakenbyanewinvestoris:

A:

openanaccountwithastockbroker

B:

buyunitsinamanagedfund

C:

obtaindirectaccesstotheCLICKXTsystem

D:

openanaccountwithacashmanagementtrust.

Feedback:

Directinvestmentmeansthattheinvestordirectlybuysshares,ratherthaninvestingindirectlyviaamanagedfund.IndividualinvestorsarenotabletogetdirectaccesstotheCLICKXTsystemandhavetotradethroughabroker.Whileanaccountwithacashmanagementtrustmaybeneededtosettletrades,thefirststepwouldbetoopenanaccountwithabroker,soAisthecorrectanswer.

More:

FinancialInstitutions,InstrumentsandMarkets5/e,p.252.

Therearetwoapproachestobuyingandsellingsharesthroughastockexchange:

directinvestmentandindirectinvestment.Withthedirectinvestmentstrategy,aninvestorwillchoosetobuyorsellsharesdirectlythroughastockbroker.Chapter4discussesthebuyingandsellingofshareswithinthecontextoftheASX’selectronictradingandsettlementssystems:

CLICKXTandCHESS.ItmaybeusefultolookagainatFigure4.3,asitdepictstheprocessesofbuyingandsellingontheASX.

Question8:

Asmallinvestorwhowishestoinvestdirectlyinshareswiththelowesttransactioncostsshould:

A:

directlyplaceorderswithastockexchangeviatheexchange’swebsite

B:

useadiscountbroker

C:

useafullservicebro