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1.
When Morningstar Ratings for stocks change, the changes are usually based on _______.
Changes in stock prices. The assessments don't change much, but the stock prices naturally do.
2.
Five-star stocks should generate a return _______.
Greater than the company's cost of equity. Five-star stocks should offer investors a return that is greater than the company's cost of equity. The cost of equity is often called the "required return," because it represents the return an investor requires for taking on the risk of owning a stock. Since 5-star stocks are considerably undervalued, we expect investors will enjoy high returns that significantly exceed the risks associated with investing in the stock.
3.
What is a drawback of using ratios (such as price/earnings ratio or price/book ratio) to value stocks?
They require context to understand. For example, there may be a disconnect between the ratio and the market price of the stock.
4.
An estimate of a company's fair value involves determining how much one would pay today for all the sales generated by the company in the future.
False. Rather than sales, the estimate uses streams of excess cash.
5.
The Morningstar Rating for a stock can change for which of the following reasons?
A combination of any of these factors. Any one or several of these factors can cause a change in the rating.
