MaxMarkCh06QuestionsOnly.docx

1、MaxMarkCh06QuestionsOnlyMenuItem 6: (Topic 6) Investors in the share marketQuestion 1: The risks faced by investors in shares can be divided into two categories: systematic risk and unsystematic risk. Which of the following is a source of systematic risk?A: changes in the interest rate on 10-year bo

2、ndsB: variations in productivity at a companys main factoryC: changes in the cost of specialised labourD: changes in the effectiveness of a companys managersFeedback: Changes in interest rates will affect the market as a whole and are, therefore, a source of systematic risk. The factors mentioned in

3、 B and D would only affect returns for an individual company; while, for C the effects would be confined to a small number of companies, so B, C and D are all sources of unsystematic risk.More: Financial Institutions, Instruments and Markets 5/e, Section 6.1, p. 249.Within the context of investing i

4、n shares listed on a stock exchange, risk can be categorised as (1) systematic, and (2) unsystematic. Systematic risks are those risk exposures that will have an impact on share prices generally in the market. The majority of shares listed on a particular stock exchange will be affected to a lesser

5、or greater degree. The impact may be positive or negative. Examples of systematic risk exposures include: changes in interest rates changes in exchange rates contraction or expansion in economic activity introduction of new legislation political stability changes in market confidence and perception.

6、Question 2: The risks faced by investors in shares can be divided into two categories: systematic risk and unsystematic risk. Which of the following is a source of unsystematic risk?A: an increase in the company tax rateB: a change in the value of the Australian dollarC: replacement of a companys ch

7、ief executiveD: the occurrence of a widespread droughtFeedback: Replacement of a chief executive is a company-specific event and is, therefore, a source of unsystematic risk. The factors listed in A, B and D would have market-wide effects.More: Financial Institutions, Instruments and Markets 5/e, Se

8、ction 6.1, p. 249.On the other hand, unsystematic risk affects a single corporation or a small group of companies. Examples of unsystematic risk exposures that will have an impact on a corporation include: the resignation of an executive manager a change in future performance forecasts the failure o

9、f technology or communication systems dissent within the board of directors rumour or evidence of financial difficulty.Question 3: Liquidity in a stockmarket is important to investors because if a market is liquid:A: there are many listed securities to choose fromB: the securities listed are less ri

10、sky than unlisted investmentsC: investors can generally buy or sell shares at the current market priceD: brokerage costs are lowFeedback: A market is regarded as liquid if there are many buyers and sellers present in the market. Under these circumstances a large order to buy or sell can be executed

11、with little or no effect on the market price so C is correct.More: Financial Institutions, Instruments and Markets 5/e, p. 246.Liquidity is attractive to investors in a stock market because they know that in most circumstances they are able to buy and sell shares at the current market price. This me

12、ans that they can buy and sell long-term, higher-risk securities and at the same time maintain liquidity in their investment portfolio. A stock exchange measures liquidity as the volume of trading relative to the size of the market.Question 4: Investors are often advised to hold a diversified portfo

13、lio. Which of the following portfolios offers the greatest diversification?A: shares in ten different banksB: ten stocks from different industriesC: equal proportions of Australian shares, bonds and international sharesD: shares in 25 companies that were selected at randomFeedback: Diversification i

14、s more effective when the correlation between returns on securities is low. For a share portfolio, effective diversification requires a spread of companies from different industries. Greater risk reduction will be achieved by including other asset classes such as bonds, property and international sh

15、ares.More: Financial Institutions, Instruments and Markets 5/e, p. 249.Investment choices available through shares listed on a stock exchange enable an investor to diversify away most of the unsystematic risk. Investment theory contends that by holding a diversified investment portfolio an investor

16、is able to minimise the risk exposures associated with investing in a single share. A diversified investment portfolio would include a range of investment categories, including shares, fixed-interest securities and property. The share component of an investment portfolio would hold a range of shares

17、 across different industry groupings. It is generally agreed that a diversified share portfolio will include somewhere between ten and twenty-five stocks.Question 5: Investments may be managed actively or passively. An active investment approach may be most accurately described as:A: trading frequen

18、tly on an intra-day basis as prices changeB: investing in shares with high betasC: using technical analysis to guide trading decisionsD: attempting to achieve superior returns through successful stock selectionFeedback: An active investor in shares will structure a portfolio of shares that are expec

19、ted to provide higher returns than others and will then buy and sell shares as new information becomes available. Active investment does not need to involve intra-day trading or investing only in shares with high betas, so A and B are incorrect. While an active investor may use technical analysis, i

20、t is not the only technique that such investors rely on, so C is also incorrect.More: Financial Institutions, Instruments and Markets 5/e, pp. 249250.Investors in the share market must also decide whether to take an active or passive investment approach. Active investment involves an investor making

21、 strategic stock selections to structure a share portfolio. An active investor will buy and sell shares based on new information received and changes in personal risk and return preferences. Two active investment approaches, fundamental analysis and technical analysis, are discussed in detail in Cha

22、pter 7. Each of these approaches will influence the structure and composition of an investment share portfolio.Question 6: Which of the following statements about fundamental analysis and technical analysis is correct?A: technical analysis focuses on identifying trends in market indices rather than

23、in the prices of individual sharesB: technical analysis is regarded as a passive investment approachC: fundamental analysis relies solely on analysis of a companys financial statementsD: technical analysis relies heavily on analysis of share price data whereas fundamental analysis relies on a broade

24、r set of information Feedback: Technical analysis aims to find and interpret patterns in past share price data. Fundamental analysis aims to find mispriced securities by analysis of the outlook for a companys business so, consistent with D, it uses much more information than technical analysis.More:

25、 Financial Institutions, Instruments and Markets 5/e, p. 250.Briefly, technical analysis considers trends that are evident over time in individual share prices or groups of share prices, as represented in share-market indices. Technical analysts contend that history, or market behaviour, will be rep

26、eated from time to time. Therefore, if an emerging share price trend corresponds to a past price trend, there is an expectation that current share prices will react as they did previously. Share price trends are plotted on graphs using a range of quantitative techniques, such as calculating a thirty

27、-day moving average of price movements.The fundamental analysis approach, on the other hand, considers the financial performance of a corporation. This involves the analysis of financial and accounting ratios such as the return on equity, the debt-to-equity ratio, the debt-servicing capacity and liq

28、uidity. Fundamental analysis also considers economic fundamentals that will have an impact on the performance of a corporation or the share market generally. Examples of economic fundamentals include productivity levels, employment levels, the business cycle and fiscal and monetary policies.Question

29、 7: To undertake direct investment, the first step taken by a new investor is:A: open an account with a stockbrokerB: buy units in a managed fundC: obtain direct access to the CLICK XT systemD: open an account with a cash management trust.Feedback: Direct investment means that the investor directly

30、buys shares, rather than investing indirectly via a managed fund. Individual investors are not able to get direct access to the CLICK XT system and have to trade through a broker. While an account with a cash management trust may be needed to settle trades, the first step would be to open an account

31、 with a broker, so A is the correct answer.More: Financial Institutions, Instruments and Markets 5/e, p. 252.There are two approaches to buying and selling shares through a stock exchange: direct investment and indirect investment. With the direct investment strategy, an investor will choose to buy

32、or sell shares directly through a stockbroker. Chapter 4 discusses the buying and selling of shares within the context of the ASXs electronic trading and settlements systems: CLICK XT and CHESS. It may be useful to look again at Figure 4.3, as it depicts the processes of buying and selling on the ASX.Question 8: A small investor who wishes to invest directly in shares with the lowest transaction costs should:A: directly place orders with a stock exchange via the exchanges websiteB: use a discount brokerC: use a full service bro