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Unformatted text preview: Chapter 7 Practise MCQs 1 Which of the following statements about evidence on market efficiency is not correct?A) There is evidence that above-normal returns can be made using publicly available information. B) It is reasonable to conclude that sharemarkets are generally efficient. C) There is evidence that the shares of small firms provide higher returns than the shares of large firms. D) US studies show that some that public access to non-public Feedback: The evidence shows traders with information is quickly information are able to therefore, returns than other earn abnormal impounded into prices and earn highercannot be used toinvestors. returns so A is untrue, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, p. 262. 2 The Feedback: The top-down form of fundamental analysis that seeks to top-down approach is one approach is based on analysing the overall identify A) Growth factors that to identify factors cashmay affectbusiness. economic rates of major international economies economic environment may impact on the that flows of a the Which of the following is not a factor that would usually be considered when profitability of industry sectors and firms within those sectors. The B) Interest rate movements usingactors listed in A, B and C could all be relevant to that approach. f the top-down approach? C) Price rises as measured by the rate of inflation However, profitability comparisons between firms form part of the D) Comparison of rates of return on shareholders' funds bottom-up approach, not the top-down approach, so D is the answer.MORE: Financial Institutions, Instruments and Markets 6/e pp. 242-243. 3 It is common to identify two approaches to fundamental analysis: the bottom-up and top-down approaches. can be investor is uncertain about which approach to A) Either approach A new used use in structuring his share portfolio. Which of the following statements B) representsUse only the advice for this investor? appropriate bottom-up approach because well managed companies will prosper under any economic conditions C) Use a combination of the two approaches Feedback: The investor will have to decide how to allocate funds D) Use only the top-down approach because all the companies in a across industry sectors and also which particular shares to select given withinindustry will provide is preferable to use a combination of the topeach sector, so it similar returns down and bottom-up approaches.MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 4 The bottom-up approach is one form of selecting stocks based on the fundamental analysis. Its implementation would consider which of the following A) I and II only factors?I: the capital structureII: liquidityIII: profitabilityIV: expected interest B) I, II and III rateV:expected inflation rate C) IV and V only D) I,II,III, IV and V Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 242-243. 5 The top-down approach to fundamental analysis considers the macro factors that affect the whole market environment. It may suffer from a major weakness in A) it can be difficult to infer the impact of these macro factors on the that: performance of individual firms. B) it is merely based on past information. C) the analysis environment is very dynamic as these macro factors are often highly related. D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 6 The balance of payments current account records the net trade in goods and services, international investment and borrowings of a country with the rest of A) the world. Would it be relevant to the assessment of future price movements of No, it is only relevant for firms which involve international trades. the share market as a whole? B) Yes, its influence on the future movements of the exchange rate is relevant to market movements as a whole. C) Yes, its influence on the monetary and budgetary policy will affect the profitability of all business. D) No, there is no relation between the balance of payments current account and the movement of the share market. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 246. 7 The majority of firms are exposed to interest rate risk. Identify which of the following statements in relation to interest rate risk is not correct. A) Only firms which have debt in their corporate structure are exposed to rising interest rate risk. B) Interest rate risk can be hedged through the use of derivatives. C) There is a strong relationship between the level of exchange rate and the level of interest rate. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 245-246. 8 As labour costs attribute to a significant share of business expenses, the profitability of a company is directly driven by wages growth. Which of the A) Fall in profits, as economic growth automatically translates to an following would be the consequence of an economic expansion on a company's increase in wages growth. profits? B) Increase in profits, as wages will fall during an economic expansion. C) Profits may increase or fall, as changes in wages levels are also affected by the wage-setting mechanism in place. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 247. 9 Fundamental analysis can be adopted to support the investment decision. Identify A) It is of the followingon past information. which merely based statements best describes the major drawback(s) of this particular approach. B) It cannot predict the timing of the price correction for mispriced securities. C) It relies on the assumption that historic patterns in share price movements will re-emerge in the future. D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 10 Buy and sell signals can be generated by constructing moving average series from the actual price series, using which of the following rules?I: Buy when the A) I only actual price series cuts the MA from above.II: Buy when the MA series is rising B) I and II strongly and the price series cuts or touches the MA from below, but then moves C) III and IV back below the MA after only a few observations.III: Sell when the MA flattens, D) after a the given options or declinesNone of steady rise, and the price series cuts the MA from above.IV: Sell Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, when the MA series is in decline and the price series cuts or touches the MA frompbelow, but then moves back beneath the MA after only a few observations. . 252. 11 Technical analysis is often employed to assess the behaviour of share prices. Identify A) which of the following statements in relation to technical analysis is not One major criticism of its validity is that it does not consider correct. fundamentals of the share price. B) Technical analysis only comprises two different forms – moving average models and charting. C) It relies on the assumption that historic patterns in the share price movement will re-emerge in the future. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 250-251. 12 A lawyer works for a consulting firm that advises corporations planning to sue others for antitrust damages. efficiency.that she can beat the market by short A) weak form market She finds selling stocks of firms that will be sued. This finding is in violation of: B) semi-strong form market efficiency. C) strong form market efficiency. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 261-262. 13 The efficient market hypothesis is fundamentally based on the random walk hypothesis. Which of the following statements in relation to the random walk A) Technical analysis has no value as future price movements are hypothesis is correct? independent of historical prices. B) Stock price is normally distributed C) The path of a price series is random and unpredictable D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 262. Chapter 7 Practise MCQs C no 07 qu hapter 0 1 4070140898 7395138 1 4 1 Which of the following statements about evidence on market efficiency is not correct?A) There is evidence that above-normal returns can be made using publicly available information. B) It is reasonable to conclude that sharemarkets are generally efficient. C) There is evidence that the shares of small firms provide higher returns than the shares of large firms. D) US studies show that some that public access to non-public Feedback: The evidence shows traders with information is quickly information are able to therefore, returns than other earn abnormal impounded into prices and earn highercannot be used to investors. returns so A is untrue, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, p. 262. 2 4 2 The Feedback: The top-down form of fundamental analysis that seeks to top-down approach is one approach is based on analysing the overall identify A) Growth factors that to identify factors cashmay affectbusiness. economic rates of major international economies economic environment may impact on the that flows of a the Which of the following is not a factor that would usually be considered when profitability of industry sectors and firms within those sectors. The B) Interest rate movements usingactors listed in A, B and C could all be relevant to that approach. f the top-down approach? C) Price rises as measured by the rate of inflation However, profitability comparisons between firms form part of the D) Comparison of rates of return on shareholders' funds bottom-up approach, not the top-down approach, so D is the answer.MORE: Financial Institutions, Instruments and Markets 6/e pp. 242-243. 3 4 3 It is common to identify two approaches to fundamental analysis: the bottom-up and top-down approaches. A new investor is uncertain about which approach to A) Either approach can be used use in structuring his share portfolio. Which of the following statements B) representsUse only the advice for this investor? appropriate bottom-up approach because well managed companies will prosper under any economic conditions C) Use a combination of the two approaches Feedback: The investor will have to decide how to allocate funds D) Use only the top-down approach because all the companies in a across industry sectors and also which particular shares to select given withinindustry will provide is preferable to use a combination of the topeach sector, so it similar returns down and bottom-up approaches.MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 4 4 4 The bottom-up approach is one form of selecting stocks based on the fundamental analysis. Its implementation would consider which of the following A) I and II only factors?I: the capital structureII: liquidityIII: profitabilityIV: expected interest B) I, II and III rateV:expected inflation rate C) IV and V only D) I,II,III, IV and V Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 242-243. 5 5 4 The top-down approach to fundamental analysis considers the macro factors that affect the whole market environment. It may suffer from a major weakness in A) it can be difficult to infer the impact of these macro factors on the that: performance of individual firms. B) it is merely based on past information. C) the analysis environment is very dynamic as these macro factors are often highly related. D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 6 4 6 The balance of payments current account records the net trade in goods and services, international investment and borrowings of a country with the rest of A) the world. Would it be relevant to the assessment of future price movements of No, it is only relevant for firms which involve international trades. the share market as a whole? B) Yes, its influence on the future movements of the exchange rate is relevant to market movements as a whole. C) Yes, its influence on the monetary and budgetary policy will affect the profitability of all business. D) No, there is no relation between the balance of payments current account and the movement of the share market. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 246. 7 4 7 The majority of firms are exposed to interest rate risk. Identify which of the following statements in relation to interest rate risk is not correct. A) Only firms which have debt in their corporate structure are exposed to rising interest rate risk. B) Interest rate risk can be hedged through the use of derivatives. C) There is a strong relationship between the level of exchange rate and the level of interest rate. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 245-246. 8 4 8 As labour costs attribute to a significant share of business expenses, the profitability of a company is directly driven by wages growth. Which of the A) Fall in profits, as economic growth automatically translates to an following would be the consequence of an economic expansion on a company's increase in wages growth. profits? B) Increase in profits, as wages will fall during an economic expansion. C) Profits may increase or fall, as changes in wages levels are also affected by the wage-setting mechanism in place. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 247. 9 4 9 Fundamental analysis can be adopted to support the investment decision. Identify A) It is of the followingon past information. which merely based statements best describes the major drawback(s) of this particular approach. B) It cannot predict the timing of the price correction for mispriced securities. C) It relies on the assumption that historic patterns in share price movements will re-emerge in the future. D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 242. 10 4 10 Buy and sell signals can be generated by constructing moving average series from the actual price series, using which of the following rules?I: Buy when the A) I only actual price series cuts the MA from above.II: Buy when the MA series is rising B) I and II strongly and the price series cuts or touches the MA from below, but then moves C) III and IV back below the MA after only a few observations.III: Sell when the MA flattens, D) after a the given options or declinesNone of steady rise, and the price series cuts the MA from above.IV: Sell Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, when the MA series is in decline and the price series cuts or touches the MA fromp. 252. but then moves back beneath the MA after only a few observations. below, 11 4 11 Technical analysis is often employed to assess the behaviour of share prices. Identify A) which of the following statements in relation to technical analysis is not One major criticism of its validity is that it does not consider correct. fundamentals of the share price. B) Technical analysis only comprises two different forms – moving average models and charting. C) It relies on the assumption that historic patterns in the share price movement will re-emerge in the future. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 250-251. 12 4 12 A lawyer works for a consulting firm that advises corporations planning to sue others for antitrust damages. She finds that she can beat the market by short A) weak form market efficiency. selling stocks of firms that will be sued. This finding is in violation of: B) semi-strong form market efficiency. C) strong form market efficiency. D) None of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 261-262. 13 4 13 The efficient market hypothesis is fundamentally based on the random walk hypothesis. Which of the following statements in relation to the random walk A) Technical analysis has no value as future price movements are hypothesis is correct? independent of historical prices. B) Stock price is normally distributed C) The path of a price series is random and unpredictable D) All of the given options. Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 262. no 4395138R R <esults epor 1table ¶style= E-mail Your Results ...
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