MaxMarkCh07QuestionsOnly.docx

MaxMarkCh07QuestionsOnly.docx

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MaxMarkCh07QuestionsOnly

MenuItem7:

（Topic7）Forecastingsharepricemovements

Question1:

Thebottom-upapproachisoneformoffundamentalanalysis.Whichofthefollowingstatementsinrelationtothebottom-upapproachismostaccurate?

‘Thebottom-upapproach:

A:

identifiesdifferencesinsystematicriskbetweenindustrysectors’

B:

isappliedtoselectspecificstocksfromwithinpreferredindustrysectors’

C:

identifiesawelldiversifiedportfoliothateliminatesunsystematicrisk’

D:

providesinvestmentindicatorsbasedonforecastfinancialratios’

Feedback:

Thebottom-upapproachtosecurityanalysisbeginsbyfocusingonforecastsofreturnsforindividualstocksinanefforttodistinguishthosethatareattractiveforpurchasefromothersthatshouldbesold.AnswerBistheonlyanswerthatisconsistentwiththenatureofthebottom-upapproach.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.295.

Theinvestorhasanumberofchoicesofcompanysharestobuywithineachofthosesectors.Inwhichcompaniesshouldtheinvestorpurchaseshares?

Howcantheinvestormakeaninformedinvestmentdecision?

Fundamentalanalysisusingthebottom-upapproachassistsaninvestorwiththatanalysis.

Thefundamentalanalysisbottom-upapproachconsidersmicrofactorsthatindicateafirm’sfinancialperformanceanditsoperationalandmanagementperformance.Theapproachfocusesonaccountingratiosandothermeasuresofafirm’sperformance.

Question2:

Thebottom-upapproachtofundamentalanalysisconsidersthemicrofactorsthatreflectacompany’sperformance.Bottom-upanalysismaysufferfromamajorweaknessinthat:

A:

itcanbedifficulttoincorporatedifferencesinriskbetweencompanies

B:

unsystematicriskisdifficulttoestimate

C:

financialperformanceisdifficulttoassess

D:

thedatathatismostreadilyavailablerelatestothepast

Feedback:

Themainpurposeoffundamentalanalysisistoidentifyinvestmentsthatwillbeattractiveinthefutureandthisinvolvesmakingforecastsofvariablessuchasearnings,cashflowsanddividends.Accountingdataandmostotheravailableinformationishistoric,whichcanbeamajorlimitation.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.297.

Whilethedetailandthedisciplineofthebottom-upapproachisappealingtomanyinvestors,theapproachmaysufferfromamajordrawback.Thedrawbackrelatestotheneedtocalculatetheperformanceratiosusinghistoricdata.Thehistoricdataprovidesusefulinformationonpastperformance,whichmaybeanindicatoroffutureperformance,butitisalsopossiblethatfutureperformancemaybedifferent.Thisraisesthequestionofhowtoforecastthefuturedirectionoftheperformanceofafirm,theindustrysectorandthestockmarketgenerally.Thefundamentalanalysissolutionistocombineatop-downapproachwiththebottom-upapproach.

Question3:

Ingeneral,thelargestsingleinfluencethatcausessharepricestochangeis:

A:

changesininterestrates

B:

reportsbybrokers’analysts

C:

companyreportsandeconomicdata

D:

newinformation

Feedback:

TheitemsinA,BandCcanallinfluenceshareprices.Ingeneral,sharepriceschangebecausemarketparticipantshavereceivednewinformationwhichcausesatleastsomeofthemtorevisetheirassessmentofthevalueofasharesoDiscorrect

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.286.

Theonlysafestatementthatcanbemadeaboutthemarketpriceforacompany’ssharesisthatthepriceisdeterminedbythedemandforandsupplyoftheshares.Thismaybedescribedastheliquidityofthespecificstockandthestockmarketgenerally.Demand,supplyandliquidityaremostlyinfluencedbynewinformationcomingtothemarket.Newinformationmaybeactualreportsanddata,oranalysisrelatingtoforecastchangesinperformanceorfundamentals.

Question4:

Thetop-downapproachisoneformoffundamentalanalysis.Whichofthefollowingstatementsinrelationtothetop-downapproachismostaccurate?

‘Thetop-downapproach:

A:

identifiesspecificstocksforinclusioninaninvestmentportfolio’

B:

providesameasureofthelevelofunsystematicriskinthemarket’

C:

comparestheperformanceoffirmsthroughfinancialratioanalysis’

D:

identifieseconomicfactorsthatmayimpactonindustrysectorperformanceinthefuture’

Feedback:

Top-downanalysisbeginsbyfocusingonbroadmacroeconomictrendsandthenconsidershowforecastchangesarelikelytoimpactonindustrysectorsandindividualcompanies—whichisconsistentwiththestatementinD.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.288.

Thepositiontakenbyanalystsinthetop-downapproachisthatitisnecessarytoforecastandanalysetheoveralleconomicenvironmentandconsiderhowtheforecastdevelopmentswillimpactontheperformancesofvariousfirmsandindustr