ABC Investment Strategies 3 — Questions and Answers
Question 1: A public relations team is drafting a press release about their company's ESG investment fund launch. ESG stands for:
- Equity, Security, and Growth
- Environmental, Social, and Governance (Correct answer)
- Earnings, Stability, and Gains
- Exchange, Sector, and Geography
Correct answer: Environmental, Social, and Governance
ESG investing evaluates companies on Environmental, Social, and Governance criteria alongside financial metrics.
Question 2: Which investment vehicle pools money from many investors to purchase a diversified portfolio of stocks or bonds, managed by a professional?
- Certificate of deposit
- Mutual fund (Correct answer)
- Treasury bond
- Savings account
Correct answer: Mutual fund
Mutual funds aggregate capital from multiple investors and are managed by professional portfolio managers to achieve stated objectives.
Question 3: When explaining liquidity risk in a stakeholder report, a communicator should convey that it refers to:
- The risk that interest rates will rise
- The risk of not being able to sell an asset quickly at fair value (Correct answer)
- The risk of inflation eroding purchasing power
- The risk of a company defaulting on its debt
Correct answer: The risk of not being able to sell an asset quickly at fair value
Liquidity risk is the danger of being unable to convert an investment to cash quickly without a significant price concession.
Question 4: A financial communicator explaining a 'rebalancing' strategy to employees should describe it as:
- Selling all underperforming assets immediately
- Restoring a portfolio to its target asset allocation after market shifts (Correct answer)
- Adding leverage to boost returns in bull markets
- Switching brokers when fees increase
Correct answer: Restoring a portfolio to its target asset allocation after market shifts
Rebalancing realigns a portfolio's asset mix to its original target weights after market fluctuations cause drift.
Question 5: Which of the following best describes a passive investment strategy?
- Frequent buying and selling based on market analysis
- Tracking a market index with minimal trading activity (Correct answer)
- Concentrating holdings in high-growth sectors
- Using derivatives to hedge every position
Correct answer: Tracking a market index with minimal trading activity
Passive investing seeks to replicate index performance rather than beat the market, typically resulting in lower fees and turnover.
Question 6: In investor relations communications, which metric is most commonly used to communicate a stock's relative valuation?
- Earnings per share (EPS)
- Price-to-earnings (P/E) ratio (Correct answer)
- Debt-to-equity ratio
- Current ratio
Correct answer: Price-to-earnings (P/E) ratio
The P/E ratio compares a company's share price to its earnings per share, signaling whether the stock is over- or undervalued relative to peers.
Question 7: A business communicator advising on a capital campaign must understand that 'opportunity cost' in investing means:
- The brokerage fee for executing a trade
- The foregone return from the next best alternative investment (Correct answer)
- Tax liability on capital gains
- The cost of hedging a position
Correct answer: The foregone return from the next best alternative investment
Opportunity cost represents the potential return sacrificed by choosing one investment over the next best available option.
ABC Investment Strategies 3
A public relations team is drafting a press release about their company's ESG investment fund launch.
ESG stands for: