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1.
Why should you study the funds in the average market capitalization section of Morningstar's style box in more detail?
The funds differ in size. Further study can tell you which funds might perform better in different market conditions; for example, very-small-cap funds might do well in an environment that favors very small companies.
2.
A fund's number of holdings tells you how much per-issue risk a fund is taking on.
True. Funds with fewer holdings are more vulnerable to troubles in one or two stocks than funds with more holdings are. Sector weightings reveal a fund's sector risk, while P/E and P/B ratios relative to a fund's peers reflect price risk.
3.
Price risk is the risk that securities will cost too much.
False. Price risk is the risk that securities will be overvalued by the market.
4.
A fund's turnover rate tells you how frequently the manager trades the portfolio.
True. Buy-and-hold managers will have lower turnover rates than managers who buy and sell stocks on short-term factors.
5.
Sector weightings in a fund tell you what?
What industries your manager favors. If a fund has 50% of its portfolio in the technology sector, for example, half of its performance will be determined by the strength or weakness of that one sector.
