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ETFs 108: Using Exchange-Traded Funds Opportunistically

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1.
To determine whether an exchange-traded fund is over- or undervalued, analysts compare their own fair value estimate for the fund with _______.
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The fund's current market price. Analysts must compare prices with each other.
2.
Which of the following would NOT be considered an opportunistic investment in exchange-traded funds?
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Because he lacks any conviction, Henry decided to park his money in a total market ETF. Henry has made the conscious decision to simply take on market beta, as he doesn't have any opinions or the conviction to make an opportunistic investment. All of the other choices describe opportunistic investments, as they attempt to take advantage of short-term dislocations between the market price and what they perceive to be an appropriate long-term fair value.
3.
Sally decided to shift her portfolio into diversified ETFs because her performance suffered from her single stock selections. The type of risk that Sally is looking to mitigate in her investment portfolio can be referred to as firm-specific, or _______ risk.
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Idiosyncratic. This can also be referred to as "nonsystematic risk," which is defined as risk that is unique to a certain asset or company. An example of nonsystematic risk is the possibility of poor earnings a strike amongst a company's employees.
4.
To determine whether an exchange-traded fund is over- or undervalued, analysts compare their fair value estimate for the fund with the fund's current market price.
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True. Analysts must compare market prices with each other.
5.
To determine whether an exchange-traded fund is over- or undervalued, analysts compare their fair value estimate for the fund with other fair value estimates.
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False. Analysts compare their fair value estimate for the fund with the fund's current market price.