CPM Equity Portfolio Management 2

Question 1

Dividend discount models (DDM) value a stock based on:

Accepted Answer

The present value of all expected future dividend payments

Answer

The DDM values a stock as the present value of its expected future dividends, discounted at the required rate of return, making it appropriate for dividend-paying companies.

Question 2

Which of the following describes a long/short equity strategy?

Accepted Answer

Simultaneously buying stocks expected to outperform and short-selling stocks expected to underperform

Answer

Long/short equity strategies take long positions in stocks expected to rise and short positions in stocks expected to fall, aiming to generate returns with reduced market exposure.

Question 3

The price-to-book (P/B) ratio is particularly useful for analyzing:

Accepted Answer

Financial institutions where book value reflects asset quality

Answer

The P/B ratio is most applicable to financial companies (banks, insurance firms) where the balance sheet closely represents actual asset values and book value is a meaningful metric.

Question 4

Which of the following events would most likely cause a large-cap growth stock's P/E ratio to compress?

Accepted Answer

Rising interest rates that increase the discount rate applied to future earnings

Answer

P/E ratios compress when discount rates rise (often due to higher interest rates), as the present value of future earnings falls, making investors less willing to pay a high multiple.

Question 5

Which equity management style is most likely to have the lowest portfolio turnover?

Accepted Answer

Long-term fundamental value investing

Answer

Long-term fundamental value investing holds stocks until they reach intrinsic value, resulting in low portfolio turnover and lower transaction costs compared to momentum or tactical strategies.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Equity Portfolio Management 2