INVESTMENTS ANALYSIS AND MANAGEMENT 12TH EDITION BY CHARLES – Test Bank

File: Ch.11, Chapter 11: Common Stocks: Analysis and Strategy,

Multiple Choice Questions

A general consensus of analysts is that a typical investor should have between ___ and ______ percent of his/her portfolio in international markets.

a. 5: 10
b. 10: 20
c. 20: 30
d. 30: 40

Ans: b
Difficulty: medium
Ref: A Global Perspective

For adequately diversified common stock portfolios, market effects often account for ——– percent and more of the variability of the portfolio’s return.

60
70
80
90

Ans: d
Difficulty: medium
Ref: The Impact of the Overall Market on Stocks

3. From 1989 to April 2003, the Japanese stock market lost what percent of its value?

a. 50
b. 60
c. 70
d. 80

Ans: d
Difficulty: medium
Ref: The Impact of the Overall Market on Stocks

4. Which of the following is TRUE regarding fluctuations in both individual stock prices and portfolios of stocks?

a. aggregate market movements are the largest single factor explaining these fluctuations
b. beta is the largest single factor explaining these fluctuations
c. standard deviation of returns is the largest single factor explaining these
fluctuations
d. financial risk is the largest single factor explaining these fluctuations

Ans: a
Difficulty: medium
Ref: The Impact of the Overall Market on Stocks

5. The required rate of return for a common stock is defined as the:

expected return given an assumed set of probabilities and expected cash flows on the stock.
maximum expected return based on estimates of expected cashflows from the stock.
minimum expected return necessary to induce an investor to purchase the stock. expected return after evaluation of the risk on the stock has been taken.

Ans: c
Difficulty: easy
Ref: The Impact of the Overall Market on Stocks

6. The ————– provides investors with a method of calculating a required return for a stock.

dividend discount model
risk-free rate
Fisher model
Capital Asset Pricing Model

Ans: d
Difficulty: medium
Ref: The Impact of the Overall Market on Stocks

7. A bear market is one characterized by a decline of:

10% or more.
15% or more.
20% or more.
25% or more.

Ans: c
Difficulty: medium
Ref: The Impact of the Overall Market on Stocks

8. Individual investors consider the investment decision:

based on market and economic conditions as consisting of asset allocation.
based on market and economic conditions as consisting of asset allocation and security selection.
based on objectives, constraints, and preferences, as consisting of asset allocation.
based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.

Ans: d
Difficulty: medium
Ref: Building Stock Portfolios

9. If investors in the market become more pessimistic, it is expected that the required return will ———-.

decrease.
increase.
stay the same.
there is not enough information to answer the question.

Ans: b
Difficulty: medium
Ref: Checking your Understanding

10. The most important decision to make when building a diversified stock portfolio is:

a. individual security analysis.
b. asset allocation.
c. minimization of market risk.
d. maximization of expected return.

Ans: d
Difficulty: easy
Ref: Building Stock Portfolios