Question 1

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as ________.

Accepted Answer

A) the disposition effect 
B) the investor attention hypothesis 
C) the investor overconfidence hypothesis 
D) the excessive trading costs hypothesis

Question 2

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorian's stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorian's stock?

Accepted Answer

A) Sell any Praetorian stock that she owns. 
B) Short Praetorian's stock. 
C) Revise Praetorian's equity cost of capital. 
D) Revise her estimate of Praetorian's dividend growth.

Question 3

On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11. Its competitor, UPS, had an EPS of $0.38. What would be the expected price of UPS stock on this date, if estimated using the method of comparables?

Accepted Answer

A) $4.77 
B) $7.16 
C) $9.54 
D) $10.50

Question 4

What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?

Accepted Answer

The answer of What additional adjustments are required to find...

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The most common valuation multiple is the price-earnings ratio. 
B) You should be willing to pay proportionally more for a stock with lower current earnings. 
C) A firm's price-earnings ratio is equal to the share price divided by its earnings per share. 
D) The intuition behind the use of the price-earnings ratio is that when you buy a stock, you are in a sense buying the rights to the firm's future earnings, and differences in the scale of firms' earnings are likely to persist.

Question 6

A study of trading behavior of individual investors at a discount brokerage found that individual investors ________.

Accepted Answer

A) trade very actively, despite the fact that their performance is actually worse because of trading costs 
B) trade very conservatively, despite the fact that their performance is actually worse because of trading costs 
C) trade very actively, partly because their performance is better than the professionals' due to low trading costs 
D) trade very conservatively, partly because their performance is better than the professionals' due to low trading costs

Question 7

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

Accepted Answer

A) True 
 B)False

Question 8

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

Accepted Answer