MGT 181 FINAL QUESTIONS & ANSWERS
Know the different investment styles and the types of funds that represent these styles.
- Answer -Index funds are efficient markets, value funds are value investing
Benjamin Graham is the Father of Value Investing
-founded CFA: Chartered Financial Analysis
-stressed the importance of always having a margin of safety in one's investments. This
meant only buying into a stock at a price that is well below a conservative valuation of
the business. This is important because it allows profit on the upside as the market
eventually revalues the stock to is fair value, and it also gives some protection on the
downside if things don't work out as planned and the business falters
-Basically: invest in companies under intrinsic value(value of stock based on future
earnings potential), sell once it's at that value on the market
Warren Buffet
-Value investor but would continuously hold/moniter investments as long as value is
increasing = keep with a margin of safety
-Revalue the asset periodically
-More focus on the quality of the business when investing
-He believed that the business world was divided into a number of wonderful business,
well worth investing in at a price, and a number of bad businesses not worth investing
long-term. Most of the time, businesses are not worth what they are selling for, but on
rare occasions the "wonderful" businesses are almost given away. When that happens,
buy boldly, paying no attention to current gloomy economic stock market forecasts
Philip Fisher: Father of Growth Investing(Momentum Investing)
-Sell stock if it no longer satisfies 15pt criteria or a better opportunity arises
-Interest = rapidly appreciating companies
-Buy stocks on dips when future earning potential is not reflected in price; any good
stock will sell at a high P/E ratio
-"Have a few outstanding investments, not a lot of good ones and don't stress
diversification"
-Main strategy: Network a lot and do whatever you can to
The Father of Value Investing - Answer -Benjamin Graham
Focused on profiting on the investment in stocks while minimizing downside risk. 1st to
successfully utilize security analysis. Formed the Chartered Financial Analysts
Association which is in charge of the CFA designation.
An investor who looks to invest in the opposite manner as to the trend is a... - Answer -
Contrarian
When evaluating a company a venture capitalist is looking for... - Answer -Large market
potential as well as management, proven technology, and third party validation
, Venture Capitalists invest in _______ because they want to rank ahead of ________ -
Answer -convertible preferred stock/common shareholders
Venture capitalist specialize based on... - Answer -geography and industry
Normally, venture capitalists want to see... - Answer -a working product
How many diversified stocks do you need to own to diversify risk in modern portfolio
theory? What type of risk do you diversify away? What type of risk do you remain with?
- Answer -25-30 diversified stocks. You diversify away unsystematic (unique, asset-
specific) risk which are risk factors that affect a limited number of assets such as labor
strikes, part shortages, etc. You cannot diversify systematic risk which are risk factors
that affect a large number of assets such as GDP, inflation, interest rates, etc.
Systematic risk - Answer -Risk that cannot be diversified. These are risk factors that
affect a large number of assets such as GDP, inflation, interest rates, etc.
A bond with a price less than par is selling at a ____ a bond with a price greater than
par is selling at a ___ - Answer -discount/premium
With discount bonds, the YTM > coupon
With premium bonds, the YTM < coupon
Know the various bond ratings. What ratings are investment grade and what ratings are
high yield or junk? - Answer -High Grade
Moody's Aaa and S&P AAA - capacity to pay is extremely strong
Moody's Aa and S&P AA - capacity to pay is very strong
Medium Grade
Moody's A and S&P A - capacity to pay is strong, but more susceptible to changes in
circumstances
Moody's Baa and S&P BBB - capacity to pay is adequate, adverse conditions will have
more impact on the firm's ability to pay
Low Grade
Moody's Ba, B, Caa, and Ca
S&P BB, B, CCC, CC
Considered speculative with respect to capacity to pay. The "B" ratings are the lowest
degree of speculation
Very Low Grade
Moody's C and S&P C - income bonds with no interest being paid
Know the different investment styles and the types of funds that represent these styles.
- Answer -Index funds are efficient markets, value funds are value investing
Benjamin Graham is the Father of Value Investing
-founded CFA: Chartered Financial Analysis
-stressed the importance of always having a margin of safety in one's investments. This
meant only buying into a stock at a price that is well below a conservative valuation of
the business. This is important because it allows profit on the upside as the market
eventually revalues the stock to is fair value, and it also gives some protection on the
downside if things don't work out as planned and the business falters
-Basically: invest in companies under intrinsic value(value of stock based on future
earnings potential), sell once it's at that value on the market
Warren Buffet
-Value investor but would continuously hold/moniter investments as long as value is
increasing = keep with a margin of safety
-Revalue the asset periodically
-More focus on the quality of the business when investing
-He believed that the business world was divided into a number of wonderful business,
well worth investing in at a price, and a number of bad businesses not worth investing
long-term. Most of the time, businesses are not worth what they are selling for, but on
rare occasions the "wonderful" businesses are almost given away. When that happens,
buy boldly, paying no attention to current gloomy economic stock market forecasts
Philip Fisher: Father of Growth Investing(Momentum Investing)
-Sell stock if it no longer satisfies 15pt criteria or a better opportunity arises
-Interest = rapidly appreciating companies
-Buy stocks on dips when future earning potential is not reflected in price; any good
stock will sell at a high P/E ratio
-"Have a few outstanding investments, not a lot of good ones and don't stress
diversification"
-Main strategy: Network a lot and do whatever you can to
The Father of Value Investing - Answer -Benjamin Graham
Focused on profiting on the investment in stocks while minimizing downside risk. 1st to
successfully utilize security analysis. Formed the Chartered Financial Analysts
Association which is in charge of the CFA designation.
An investor who looks to invest in the opposite manner as to the trend is a... - Answer -
Contrarian
When evaluating a company a venture capitalist is looking for... - Answer -Large market
potential as well as management, proven technology, and third party validation
, Venture Capitalists invest in _______ because they want to rank ahead of ________ -
Answer -convertible preferred stock/common shareholders
Venture capitalist specialize based on... - Answer -geography and industry
Normally, venture capitalists want to see... - Answer -a working product
How many diversified stocks do you need to own to diversify risk in modern portfolio
theory? What type of risk do you diversify away? What type of risk do you remain with?
- Answer -25-30 diversified stocks. You diversify away unsystematic (unique, asset-
specific) risk which are risk factors that affect a limited number of assets such as labor
strikes, part shortages, etc. You cannot diversify systematic risk which are risk factors
that affect a large number of assets such as GDP, inflation, interest rates, etc.
Systematic risk - Answer -Risk that cannot be diversified. These are risk factors that
affect a large number of assets such as GDP, inflation, interest rates, etc.
A bond with a price less than par is selling at a ____ a bond with a price greater than
par is selling at a ___ - Answer -discount/premium
With discount bonds, the YTM > coupon
With premium bonds, the YTM < coupon
Know the various bond ratings. What ratings are investment grade and what ratings are
high yield or junk? - Answer -High Grade
Moody's Aaa and S&P AAA - capacity to pay is extremely strong
Moody's Aa and S&P AA - capacity to pay is very strong
Medium Grade
Moody's A and S&P A - capacity to pay is strong, but more susceptible to changes in
circumstances
Moody's Baa and S&P BBB - capacity to pay is adequate, adverse conditions will have
more impact on the firm's ability to pay
Low Grade
Moody's Ba, B, Caa, and Ca
S&P BB, B, CCC, CC
Considered speculative with respect to capacity to pay. The "B" ratings are the lowest
degree of speculation
Very Low Grade
Moody's C and S&P C - income bonds with no interest being paid
