Choose wisely. There is only one correct answer to each question.
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1.
How would a tiny change in a stock's price change its Morningstar Rating?
It likely would not change it. There is a buffer zone built into the ratings to prevent tiny changes from leading to a new rating.
2.
What does Morningstar prefer to use to value stocks?
Future profits. Using future profits is easier to understand and requires less context than using ratios.
3.
Which generally takes more time and expertise to calculate?
Future cash flows. These require a lot of financial statements, facts, and projections to calculate.
4.
Which Uncertainty Rating requires the largest discount (margin of safety) for a stock to become rated 5 stars?
Very high. Stocks with an Uncertainty Rating of Very High require the largest discount to Morningstar's Fair Value Estimate before they become rated 5 stars.
5.
The Morningstar Rating for stocks _______.
Is analyst-driven. Morningstar estimates a company's fair value by determining how much it would pay today for all the streams of excess cash generated by the company in the future. It arrives at this value by forecasting a company's future financial performance using a detailed discounted cash-flow model that factors in projections for the company's income statement, balance sheet, and cash-flow statement. The result is an analyst-driven estimate of the stock's fair value.
