Growth Investing Chapter 9
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1. 1. If you are a growth
investor, which of the
following do you believe
about the market?
a. The market always under
values growth assets
b. The market always over
values growth assets
c. The market is more likely
to make mistakes in valuing
growth assets than assets-‐
in-‐place.
d. The market is more likely
to make mistakes in valuing
assets-‐in-‐place than
growth assets.
e. None of the above.
2. 2. If you invest in small cap
stocks, you may see some
or all of your excess
returns dissipate as a result
of transactions costs. Which
of the following may cause
these higher transactions
costs?
a. Small cap stocks tend to
be held less by institutional
investors.
b. Small cap stocks
generally have lower
trading volume.
c. Small cap stocks may not
be traded on the most
active stock exchanges.
d. Small cap companies are
more likely to have low-‐
priced shares.
e. All of the above
1. C. Explanation: You believe
that the market is less capable
of valuing growth assets, both
under and over valuing them
by more. You also believe that
you have the skill to value
these growth assets better than
the market.
2. E. Explanation: Small cap
stocks are more likely to be
low priced, unlisted, illiquid
and not institutionally held, all
of which contribute to the
higher trading costs that you
see on them.
3. 3. A concern when 3. B. Explanation: It is true that there is
investing in small less known about small companies
cap companies is than large ones. While this is clearly a
that they are far source of risk if you put all of your
less likely to be money in one small company (as
followed by equity opposed to one large one), it may be
research analysts less problematic if you create a
and there is less portfolio of small companies, since
external information much of what you do not know is firm
available on these specific (and will get averaged out
companies. That across the portfolio). It is only if you
makes them more believe that what you do not know is
risky as more likely to be bad news than good
investments. that you have an additional risk.
a. True
b. False
4. 4. Assume that you 4. C. Explanation: You will end up with
decide to set up a your entire allotment in over valued
mutual fund to IPOs and less than your asked-‐for
invest in IPOs. To allotment in under valued IPOs.
take advantage of Hence, you will be over invested in
the underpricing over priced IPOs. You can try to
found in IPO mitigate the effect by doing your own
studies, you decide IPOs valuations to make judgments on
to apply for an which ones are more likely to be under
equal dollar priced. If your valuations skills are
allotment in every good, you may be able to narrow
listed IPO. Which of down your IPO requests to only under
the following can priced companies.
you expect to see in
your portfolio?
a. An equally
weighted portfolio
of all IPOs.
b. A portfolio that is
weighted more
heavily with under
priced IPOs.
c. A portfolio that is
weighted more
heavily with over
priced IPOs.
5. 5 One simple strategy 5. E. Explanation: Historical 6. 6. A widely used GARP 6. B. Explanation: When
for investing in growth earnings growth is not a good (Growth at A Reasonable interest rates are high, PE
stocks is to invest in predictor of future growth and may Price) strategy is to buy ratios will be low for any
those stocks that have be the result of accounting choices. stocks that trade at PE ratios given level of growth. Thus, if
delivered the highest It is also possible that the price is less than their expected interest rates are high and
historical (past ) set so high for growth companies growth rates. If you adopt economic growth is strong,
earnings growth. Why that even if the growth continues, this strategy, which of the you will too many companies
might this strategy not you will not be able to generate following are you likely to with PE ratios less than their
work? decent returns. face? expected growth.

e. Historical earnings a. You will find too many

growth is not a good cheap stocks when interest
predictor of future rates are low and the
earnings growth. economy is growing
strongly.
f. Even if historical
growth has predictive b. You will find too many
power, the market may cheap stocks when interest
already be pricing in rates are high and the
this growth. economy is growing
strongly.
g. High earnings
growth companies may c. You will find too many
be in riskier businesses cheap stocks when interest
than low earnings rates are low and the
growth companies. economy is in recession.

h. Earnings growth may d. You will find too many

not be more the result cheap stocks when interest
of accounting choices rates are high and the
than operating success. economy is in recession.

i. All of the above

7. 7. The key to being a successful 7. B. Explanation: For 9. 9. Which of the 9. E. Explanation: Since growth
growth investor is valuing growth growth to have the following may companies face more uncertainty,
potential. Which of the following highest value, the provide an many investors don't even try to
companies is likely to have the growth rate has to be explanation for why value them (instead going with
highest value for growth? (You can high with high excess activity is more likely momentum). The absence of analysts
assume that they have the same returns (return on to pay off with also increases the payoff to those
cost of capital of 10%) capital minus cost of growth investing than who do their homework and collect
capital). with value investing? information.
a. A company with expected
growth = 20%, Return on capital = a. Growth companies
10% tend to be smaller
b. A company with expected and less followed by
growth = 20%, Return on capital = analysts.
15%
b. Growth companies
c. A company with expected are more difficult to
growth = 5%, Return on capital = value.
10% c. Growth companies
face more
d. A company with expected uncertainty in the
growth = 5%, Return on capital = future.
15%
d. Growth companies
8. 8. When venture capitalists invest 8. F. Explanations: VCs
are more dependent
in young companies, which of the are more than capital
upon management
following services do they providers. They are
quality and decisions
generally provide? management
for success.
consultants,
a. Supply capital to meet the investment bankers
10. All of the above
company's current needs and talent seekers.
10. The Activist Growth Venture Capital
b. Provide advice on operations investor
and management
11. Growth Criteria Using criteria such as low PE ratios
c. Monitor the founder/managers of
Focused Equity relative to expected growth or
the company
Screening earnings momentum.

d. Facilitate access to other capital 12. The IPO investor
(debt and equity)
e. Prepare for initial public offering
or sale
f. All of the above
13. The Small Cap
investor
14. What is the best
definition for being a
growth investor?
Historically, stocks that make initial
public offerings tend to be smaller,
higher growth companies. This has
changed over the past few years due
to a large amount of PE money that
created hundreds of unicorns.
The simplest form of growth
investing is to buy smaller
companies in terms of market cap,
expecting these companies to be
both high growth companies and
also expecting the market to under
estimate the value of growth in these
companies.
A growth investor, believes that their
competitive edge lies in estimating
the value of growth assets, better
than others in the market.