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4. Which of the following is the best characterization of a "value" investor? a. An investor who cares about value and finding undervalued companies. b. An investor who incorporates fundamentals into his or her valuation judgment. c. An investor who buys stocks that trade at low PE ratios....

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Chapter 8

4. Which of the following is the best characterization of a "value" investor?



a. An investor who cares about value and finding undervalued companies.



b. An investor who incorporates fundamentals into his or her valuation judgment.



c. An investor who buys stocks that trade at low PE ratios.

d. An investor who buys stocks that trade at less than book value.

e. An investor who buys companies for less than the value of just its assets in place. - correct answer
1. E Explanation: While services may classify value investors as those who buy stocks with low PE and
low PBV ratios and value investors may believe that they are the only ones who care about intrinsic
value, in my view, value investors differentiate themselves by focusing on valuing assets in place and
buying those assets at a bargain price.



5. Ben Graham's screens for value stocks have been modified and adapted over time. Which of the
following types of companies do the Graham screens try to find?



a. Cheap companies that pay high dividends, have low risk and reasonable growth prospects.



b. Cheap companies that generate high and stable earnings, with little growth.



c. Cheap companies that will have high growth in the future, while paying some dividends.



d. Cheap companies that have very little debt.



None of the above. - correct answer 2. A. Explanation: The Graham screens are built
around finding cheap companies that pay high dividends, are low risk (with low debt and stable
earnings) and some earnings growth.

, 3 Warren Buffett is a legendary investor, and investors have long followed his maxims on investing.
Which of the following types of companies has he generally favored as investments?



a. Companies with simple businesses that are easy to understand.



b. Companies with strong competitive advantages (moats) and high returns on investments.



c. Companies with strong balance sheets and solid (and stable) cash flows.

d. Companies with good managers that you can trust.

e. All of the above - correct answer E. Explanation: Buffett's maxims have pushed
him towards companies that have products or services he understands (credit cards, newspapers, soda
etc.), strong brand names and/or other competitive advantages and managers that he trusts.



Looking at stock returns over the decades, it is clear that stocks with low price to book ratios have
delivered higher returns than stocks with high price to book ratios. Which of the following may best
explain the extra returns?



a. Low price to book stocks have higher growth potential than high price to book stocks.



b. Low price to book stocks generally have higher returns on equity than high price to book stocks.



c. Low price to book stocks may be riskier than high price to book stocks.



d. Low price to book stocks are more likely to have intangible assets on their balance sheets. - correct
answer 4. C. Explanation: Low price to book stocks tend to have higher returns on
equity and less growth potential than high price to book stocks. They may be riskier than high price to
book ratio companies, perhaps because they are in businesses where earnings are unstable or because
they have high debt ratios.



5. Passive value investors often look for cheap companies with good management and significant
competitive advantages (big moats). Which of the following combinations of quantitative screens would
you use to find these companies?

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