Choose wisely. There is only one correct answer to each question.
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1.
Warren Buffett prefers to invest in companies that _______.
He understands. He sticks to those companies that are within his circle of competence.
2.
Warren Buffett takes the judgments of the market seriously when he decides whether to invest in a company.
False. Buffett prefers not to evaluate his business on the whims of the market.
3.
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.
4.
Warren Buffett believes that good managers are likely to turn around a bad business.
False. Buffett does not believe that good managers are likely to turn around a bad business.
5.
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.
6.
Warren Buffett, the world's most well-known investor, believes that one must have a high IQ to succeed at investing.
False. Buffett believes that one needs the right temperament and a successful framework, but not a high IQ.
7.
Warren Buffett prefers to invest in companies that _______.
All of the above. Companies like this are very likely to produce higher cash flows over time.
