Stock Advisor Trainer 2

Question 1

A trainer recommends a stock trading at a P/E of 8 while peers average 18. What does this most likely signal?

Accepted Answer

The stock may be undervalued or facing hidden risks

Answer

A low relative P/E can indicate undervaluation or that the market is pricing in problems, so further analysis is required.

Question 2

In a Stock Advisor framework, what is the primary purpose of position sizing?

Accepted Answer

To manage risk per trade relative to total capital

Answer

Position sizing limits how much capital is exposed on any single trade to control overall portfolio risk.

Question 3

A trainee asks why diversification matters. What is the best answer?

Accepted Answer

It reduces unsystematic risk specific to individual holdings

Answer

Diversification spreads exposure across assets to reduce company-specific (unsystematic) risk, though it cannot remove market-wide risk.

Question 4

What does a 'stop-loss order' do for a stock position?

Accepted Answer

Triggers a sale when the price falls to a set level

Answer

A stop-loss order automatically sells once the price reaches a predetermined level to limit downside.

Question 5

A trainer explains dollar-cost averaging. What is its main benefit?

Accepted Answer

It reduces the impact of volatility by investing fixed amounts over time

Answer

Dollar-cost averaging spreads purchases over time so you buy more shares when prices are low and fewer when high.

Stock Advisor Practice Test