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