Meeting Investors’ Goals Coursera Quiz Answers

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Week 1: Meeting Investors’ Goals

Quiz 1: Understanding Financial Markets

Q1. What happens when the yield to maturity of a bond increases?

• Its maturity decreases.
• Its price decreases.
• Its coupon decreases.
• Its coupon increases.
• Its maturity increases.
• Its price increases.

Q2. Which of the following statements regarding “insiders” are true?

• “Insider trading” refers to “insiders” illegally exchanging shares of a company between each other.
• “Insider trading” refers to “insiders” trading on nonpublic information.
• “Insiders” are individuals that work for a stock exchange, giving them access to privileged information.
• “Insiders” are individuals that hold key positions in a company, giving them access to privileged information.

Q3. If an investor uses a “5:1” leverage ratio, what does it imply?

• His account balance will experience increases and decreases that are 5 times larger than that of an investor with the same portfolio (in terms of relative asset allocation) but no leverage.
• He has borrowed an amount of money that is equal to 4 times his own capital.
• He has borrowed an amount of money that is equal to 5 times his own capital.
• His account balance will experience increases that are 5
  times larger than that of an investor with the same portfolio (in terms of relative asset allocation) but no
  leverage. However, occasional decreases in his account balance will be the same as those of the investor using no leverage.

Q4. In this picture, what is the term that has been replaced by the green question mark and what is its purpose?

• The term that has been replaced by the green question market is “collateral”. Its purpose is to serve as an insurance for the investment bank in the short selling process.
• The term that has been replaced by the green question market is “principal”. Its purpose is to serve as an insurance for the investment bank in the short selling process.
• The term that has been replaced by the green question market is “collateral”. Its purpose is to serve as an insurance for the hedge fund in the short selling process.
• The term that has been replaced by the green question market is “principal”. Its purpose is to serve as an insurance for the hedge fund in the short selling process.

Q5. Which of the following statements regarding the “Big Mac parity” is true?

• We deducted that the Swiss Franc was overvalued with respect to the US Dollar for the following reason:
• An individual can purchase more Big Macs with a given amount of US Dollar in the USA than by changing this amount of US Dollar into Swiss Francs and then buying Big Macs in Switzerland.
• We deducted that the Swiss Franc was undervalued with respect to the US Dollar for the following reason:
• An
  individual can purchase more Big Macs with a given amount of US Dollar
  in the USA than by changing this amount of US Dollar into Swiss Francs
  and then buying Big Macs in Switzerland.
• We deducted that the Swiss Franc was overvalued with respect to the US Dollar for the following reason:
• An
  individual can purchase less Big Macs with a given amount of US Dollar
  in the USA than by changing this amount of US Dollar into Swiss Francs
  and then buying Big Macs in Switzerland.
• We deducted that the Swiss Franc was undervalued with respect to the US Dollar for the following reason:
• An
  individual can purchase less Big Macs with a given amount of US Dollar
  in the USA than by changing this amount of US Dollar into Swiss Francs
  and then buying Big Macs in Switzerland.

Q6. Suppose the yield curve is upward sloping. You expect the yield curve to flatten while the short term rates will stay the same. What does it imply?

• Long term yields will decrease so you should buy long term bonds.
• Long term yields will decrease so you should sell long term bonds.
• Long term yields will increase so you should sell long term bonds.
• Long term yields will increase so you should buy long term bonds.

Q7. When the economy is overheating and inflation is rising at dangerous rates, what will the central bank traditionally do?

• It will embark in less quantitative easing; quantitative easing being its main conventional tool.
• It will lower interest rates; interest rates being its main conventional tool.
• It will embark in more quantitative easing; quantitative easing being its main conventional tool.
• It will raise interest rates; interest rates being its main conventional tool.

Quiz 2: Guess 2/3 of the average

Q1. In this game, you are asked to choose one whole number between 0 and 100, inclusive.

The winner of this game will be the one among you whose chosen number is the closest to 2/3 (two thirds) of the average of the numbers picked by all participants.

Quiz 3: Graded quiz on the content of Week 1

Q1. We are often tempted to buy shares of a company because…

(There may be multiple correct/applicable responses, and all need to be selected)

• …we make realistic forecasts of its future earnings.
• …its share price has been increasing over the recent past.
• …we highly value the company due to the success of its products.
• …its P/E ratio is very high.

Q2. What is the question you should ask yourself when trying to decide whether or not to sell (part of) an investment?

• “If
  I had not invested in this asset, would I do it now for an
  amount equal to twice the size of my current investment?”
• “Knowing that I have invested in this asset, would I buy some more now for an
  amount equal to the size of my current investment?”
• “If
  I had not invested in this asset, would I do it now for an
  amount equal to the size of my current investment?”
• “If
  I had not invested in this asset, would I do it in one month for an
  amount equal to the size of my current investment?”

Q3. Which of the following statements are true?

• We should focus more on past returns than fundamentals (for example, the company’s valuation and strategy) when evaluating the attractiveness of a particular stock.
• In order not to be biased when making selling decisions, we should ignore the purchase price of our investments.
• We tend to buy and sell investments based on past returns.
• We
  tend to refrain from selling loss-making investments.

Q4. Which of the following statements are true?

• An investor’s financial objectives drive their risk tolerance. Additionally, financial objectives may have different priorities in the eyes of the investor. The higher the priority, the lower the risk tolerance and inversely.
• An investor’s financial objectives drive their risk ability. Additionally, financial objectives may have different priorities in the eyes of the investor. The higher the priority, the lower the risk ability and inversely.
• When evaluating an investor’s financial situation, we look at their level of wealth in conjunction with their future expenses in order to determine their risk tolerance.
• When evaluating an investor’s financial situation, we look at their level of wealth in conjunction with their future expenses in order to determine their risk ability.
• An investor’s financial objectives drive their risk tolerance. Additionally, financial objectives may have different priorities in the eyes of the investor. The lower the priority, the lower the risk tolerance and inversely.

Q5. Which of the following statements are true?

• Investors with a longer investment horizon can take less investment risk than investors with a shorter one.
• An investor’s financial situation, risk tolerance and investment horizon
  needs only to be assessed once to make sure that their investment
  strategy is well aligned with their profile throughout their life.
• An investor’s financial situation, risk tolerance and investment horizon must be reassessed regularly to make sure that their investment strategy is well aligned with their profile throughout their life.
• Investors with a longer investment horizon can take more investment risk than investors with a shorter one.

Q6. Which of the following statements are true?

• When it comes to financial decisions, our decision process is influenced by a variety of factors (sleep, mood, emotions, cognitive biases…) that actually make it very complex compared to what is described by traditional economic theory.
• When making financial decisions, we start by processing information. We then gather data. Finally, we make a decision.
• When the outcome of one of your
  decision depends on the behavior of other individuals, being completely rational (and
  assuming they are as well) will guarantee you the best possible outcome.
• When the outcome of one of your
  decision depends on the behavior of other individuals, being completely rational (and
  assuming they are as well) will not necessarily guarantee you the best possible outcome.

Week 2: Meeting Investors’ Goals

Q1. Which of the following propositions lists the basic steps in investment in the right order?

Definition of the
investment universe

• Construction of the optimal strategy
• Adjustment and rebalancing over time
• Definition of the investment universe
• Construction of the optimal strategy
• Redefinition of the investment universe
• Construction of the optimal strategy
• Adjustment and rebalancing over time
• Definition of the investment universe
• Construction of the optimal strategy
• Adjustment and rebalancing over time
• Redefinition of the investment universe
• Construction of the optimal strategy
• Definition of the investment universe
• Adjustment and rebalancing over time

Q2. Which of the following statements regarding risk aversion are true?

• People who have lived through a financial crisis tend to be more risk averse later in their life, whether or not they have lost money during the crisis.
• If we assume financial crises cause fear among investors, then investors with amygdala damage will display a higher risk aversion after a financial crisis.
• People who have lived through a financial crisis tend to be more risk averse later in their life. The older the crisis, the more pronounced the effect.
• If we assume financial crises cause fear among investors, then investors with amygdala damage will display a lower risk aversion after a financial crisis.
• If we assume financial crises cause fear among investors, then investors with amygdala damage will have the same risk aversion before and after the crisis.
• People who have lived through a financial crisis tend to be more risk loving later in their life because they may have lost money in the crisis.
• People who have lived through a financial crisis tend to be more risk averse later in their life. The more recent the crisis, the more pronounced the effect.

Q3. We have seen three main motives why people trade risky financial assets:

1. To increase personal wealth
2. To trigger emotions (i.e. gambling related thrills)
3. To gains status and value

Which of the following statements are correct?

• One could trade risky assets for motives n°2 & 3 but only in a way that does not hurt oneself financially in the long run.
• If you trade risky assets for motive n°1, then you should identify and eliminate motives n°2 & 3 from your decision process.
• One should never trade risky assets for motives n°2 & 3.
• One could trade risky assets for all of the three motives, but the portfolio built for motive n°1 must not be mixed with the one for motives n°2 &3.
• One could trade risky assets for motives n°2 & 3 but in a “fun” portfolio that must be treated like a hobby.
• One should never trade risky assets for motive n°3.
• One could trade risky assets for all of the three motives; it is only a matter of suppressing one’s bodily responses from market events.

Q4. Which of the following statements about the role of the media are true?

• The impact of negative words and/or words referring to market irrationality on stock market returns tends to revert once investor have taken the time to investigate the corresponding piece of news.
• The impact of false rumors spread on social media platforms is overlooked by the SEC.
• It is not an important source of public information that investors use to make investment decisions.
• The tone and words used by the media can convey current sentiment or confidence regarding market health.
• The impact of negative words and/or words referring to market irrationality on stock market returns is long lasting (i.e. from a couple weeks to one month).
• Unusually high or low levels of media pessimism are typically followed by a higher trading volume on the stock market.

Q5. Which of the following statements about honesty and trust are true?

• Financial market regulation is important given that individuals tend to behave like opportunists most of the time.
• The higher the financial gain for reporting earnings dishonestly, the higher the number of people choosing to do so. This relationship is true irrespective of the way individuals value moral and ethical principles.
• Individuals who highly value moral and ethical principles tend to be more honest, even if it implies earning less money.
• A higher level of trust in the legal and political environment of a country typically increases stock market participation, which is beneficial.
• When hiring people for top positions in the corporate ladder, individuals who highly value moral and ethical principles should be avoided.
• The higher the financial gain for reporting earnings dishonestly, the higher the number of people choosing to do so. This relationship is only true for individuals who highly value moral and ethical principles.
• Individuals who highly value moral and ethical principles require a large variable compensation to be motivated in the workplace.

Week 3: Meeting Investors’ Goals

Q1. Which of the following statements on market efficiency are true?

• Market efficiency is traditionally split into 4 different forms.
• The idea of market efficiency can be traced as far back as 1900.
• Market efficiency is an outdated idea.
• The concept of market efficiency can be summarized by the phrase “information is progressively integrated into asset prices”.
• The different forms of market efficiency are defined by the type of information structure they refer to.

Q2. Which of the following propositions correctly define the different forms of market efficiency?

• Weak market efficiency: past prices are integrated in current asset prices.
• Semi strong market efficiency: past public information and past prices are integrated in current asset prices.
• Strong market efficiency: past public and private information as well as past prices are integrated in current asset prices.
• Weak market efficiency: past public information is integrated in asset prices.
• Semi strong market efficiency: past public information and past prices are integrated in asset prices.
• Strong market efficiency: past public and private information as well as past prices are integrated in asset prices.
• Very strong market efficiency: asset prices behave randomly
• Weak market efficiency: past public information is integrated in current asset prices.
• Semi strong market efficiency: past public information and past prices are integrated in current asset prices.
• Strong market efficiency: past public and private information as well as past prices are integrated in current asset prices.
• Weak market efficiency: past public information is integrated in current asset prices.
• Semi weak market efficiency: past public information and past prices are integrated in current asset prices.
• Strong market efficiency: past public and private information as well as past prices are integrated in current asset prices.

Q3. Which of the following statements on weak market efficiency are true?

• If markets are weak-form efficient, one cannot create persistently profitable trading strategies by relying solely on past prices.
• We can test whether market are efficient in the weak form by testing wether today’s price is the best prediction we can make about tomorrow’s price.
• Weak market efficiency leaves the door open to profitable trading strategies relying solely on past prices.
• Finding some sort of structure in financial prices implies that there is at least some degree of predictability in these prices.
• Recently developed tests have allowed to end the debate on whether market are weak-form efficient once and for all.
• If a traded asset is weak-form efficient, then the variance of its returns scale linearly with time (i.e. the variance of 2-week returns is twice as large as the variance of 1-week returns).

Q4. Which of the following statements on semi strong market efficiency are true?

• If markets are not efficient in the semi strong form, then there is no use in having access to public information before anyone else.
• Markets that are not semi-strong efficient are attractive for traders because it implies there is some price predictability in these markets.
• Competition among traders is not helpful in rendering markets more efficient in the semi strong form.
• If new publicly available information impacts prices immediately, then the market is said to be efficient in the semi strong form.
• Event studies can be used to test the semi strong form of market efficiency.
• Markets that are not semi-strong efficient are not attractive for traders because it implies there is no price predictability in these markets.
• If new publicly available information impacts prices gradually, then the market is said to be efficient in the semi strong form.

Q5. Which of the following statements on strong market efficiency are true?

• Strong-form market efficiency can only be enforced by the intervention of regulatory agents.
• It is the most difficult form of market efficiency to test.
• If markets are strong-form efficient, then the profitability of trading strategies that rely on information that is easily accessible and at a low price (or even free) should be doubted.
• Competition among traders is sufficient to render markets strong-form efficient.
• Past insider trading scandals highlight the fact that markets have been strong-form efficient in the past.
• Competition among traders is not sufficient to render markets strong-form efficient.

Week 4: Meeting Investors’ Goals

Quiz 1: construction

Q1. Which of the following steps pertain to the “top-down” portfolio construction methodology?

• Analyzing global factors
• Technical analysis
• Analyzing sectors
• Valuation screening
• Company visits

Q2. Which of the following statements about portfolio construction are true?

• The number of stocks we start with is larger when we build a portfolio by top-down than by bottom-up.
• Company visits is considered secondary research.
• The top-down and bottom-up portfolio construction can be combined as such: once we have used the bottom-up methodology, we can further refine our stock selection by using the top-down approach.
• The top-down and bottom-up portfolio construction can be combined as such: once we have used the top-down methodology, we can further refine our stock selection by using the bottom-up approach.
• Desk research is an example of primary research.
• The number of stocks we start with is larger when we build a portfolio by bottom-up than by top-down.

Q3. Which of the following statements regarding the performance and risk management opportunities of the two portfolio construction methodologies are true?

• When
  there is a low dispersion in individual stock returns within each sector and/or
  country but a high dispersion across country and sector returns, then it pays to
  go top-down.
• When
  markets trend sideways (i.e. there is a lot of “sector rotation”), top-downers tend to win the race.
• While the bottom-up approach allows you to manage the market risk of your portfolio, the top-down one only allows you to do so if you do not need to be fully
  invested and you can do short selling.
• While the top-down approach allows you to manage the market risk of your portfolio, the bottom-up one only allows you to do so if you do not need to be fully
  invested and you can do short selling.
• When
  there is a low dispersion in individual stock returns within each sector and/or
  country but a high dispersion across country and sector returns, then it pays to
  go bottom-up.
• When
  markets trend sideways (i.e. there is a lot of “sector rotation”), bottom-uppers tend to win the race.

Q4. Which of the following statements regarding the bottom-up construction methodology is true?

• Quantitative filters are a useful tool to easily filter out companies that match certain (quantifiable) criteria.
• When building a portfolio the bottom-up way, exposure to sector or country risk is traditionally used as a way to increase potential returns.
• The discounted cash flow (DCF) model is a handy tool for bottom-up portfolio construction as it does not rely on many assumptions and complex long term forecasts.
• If a quantitative filter is applied, a qualitative assessment can be conducted afterwards but it is not an essential part of portfolio construction by bottom-up.
• Splitting the market into sectors before applying a quantitative filter helps in ensuring diversification of the portfolio at the sector level.

Quiz 2: investment styles

Q1. Which of the following statements regarding “value” and “growth” stocks are true?

• Every year, value stocks outperform growth stocks.
• Value stocks tend to outperform growth stocks.
• Value stocks are “expensive” in terms of various valuations metrics (e.g. price to earnings ratio, price to dividends ratio, price to book value ratio).
• The average yearly out-performance of value stocks over growth stocks is negligible.
• An explanation as to why growth stocks tend to outperform value stocks is that investors see them as being “distressed” and hence riskier investments, which warrants higher returns (or equivalently: a lower price).
• Value stocks have high book to price, earnings to price, cash flows to price and dividend to price ratios.

Q2. Which of the following statements regarding quantitative and qualitative (fundamental) driven investment styles are true?

• One of the disadvantage of quantitative driven investing is that it requires a lot of data.
• Quantitative driven investing typically implies more people, debates and longer meetings to reach an investment decision.
• When adopting a quantitative driven investment style, most of your time will be spent discussing how to construct your model.
• When adopting a qualitative driven investment style, the actual decision of what to buy / sell and in what quantity is done very quickly.

Q3. Which of the following characteristics describe assets that would be part of the portfolio of an investor following a momentum strategy?

• They have recently been solid performers.
• They are out-of-favor.
• They are popular and “hot”.
• They are not trading up to a price reflecting their value potential.

Q4. Which of the following statements regarding contrarian and momentum investing are true?

• Contrarian and momentum are two opposing strategies but can be successfully combined.
• A study showed that institutional investors tend to be momentum traders.
• Contrarian investing has a stabilizing effect on markets.
• Momentum investing may lead to higher price volatility.
• Contrarian investing may lead to price exaggeration through herd behavior.
• Momentum investing has a stabilizing effect on markets.

Q5. Which of the following statements regarding the core & satellite approach are true?

• Investment themes are typically found in the core part of the portfolio.
• Index funds typically have their place in the satellite part of the portfolio.
• The satellites are typically made of investments that (ideally) have a low correlation with index funds.
• The presence of actively managed funds in your portfolio’s core helps reducing management fees you have to pay.
• Having a large part of your money invested in index funds has the benefit of lowering the management fees you have to pay.
• It makes sense to invest in actively managed funds when the asset class is deemed efficient as it opens the door to out-performance opportunities.

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