Choose wisely. There is only one correct answer to each question.
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1.
Warren Buffett avoids technology stocks for all of the following reasons except _______.
Although they offer the highest returns, technology stocks are too volatile. Buffett is not scared of volatility. Rather, he does not invest in companies that are outside his circle of competence, which includes many technology companies.
2.
Warren Buffett believes that portfolio diversification _______.
Probably increases risk for informed investors by diluting the effect of their top choices, the companies with the least risk and highest potential returns. Buffett rejects the idea that diversification is helpful to informed investors. He thinks the additional investment into your best ideas is likely to yield a better result than investment into your 20th or 30th favorite company.
3.
Warren Buffett determines a company's value by estimating the company's future _______ and discounting them at an appropriate rate.
Cash flows. Buffett, like many good investors, estimates the future cash flows and then discounts them so they are expressed in today's dollars.
4.
Warren Buffett believes that he has never made a good deal with bad people.
True. Though the economics of a business is the most important factor, Buffett believes it's important to work with competent, honest managers.
5.
All of the following statements about Warren Buffett are false except _______.
Buffett believes that stock market prices are sometimes much too high or too low. Buffett focuses on the intrinsic value of businesses, not stock prices and the behavior of "Mr. Market."
6.
Companies with sustainable competitive advantages are highly likely to generate _______ with the passage of time.
Higher cash flows. Strength and predictability help.
7.
A margin of safety is _______.
The difference between a company's estimated fair value and its stock price (where the price is lower than the fair value). Since no intrinsic value calculation is perfect, Buffett requires a satisfactory margin for error before he makes an investment.
