Question

There are many types of common stock, each of which offers the investor different risks and rewards. Suppose you currently own stock in two different types of companies, Company X and Company Y. Company Y Company X Company Y is stock company, a type known for growth spurts that can dramatically affect eamings and stock prices, and most of which hold the potential for relatively risk. Company X is stock, a type of stock known for its low risk, high quality, and market value of The chart below depicts the share values of Company X and Company Y's stock over the past 10 years. Based on what you know about the different company types, identify which line is more likely to correspond to which company. STOCK PRICE 2000 2002 2004 2006 2008 2010 2012 YEAR True or False: One way of protecting against the kind of stock-value losses suffered by most stocks during the 2009 recession is by investing in cyclical stocks. O O False True

company y:

first drop down options are-

a. an income

b. a large cap

c. a bluechip

d. a small cap

second drop down options are a. high or b. low

company x:

a. a small cap

b. a growth

c. a speculative

d. a large cap

second drop down options:

a. between 2-10 billion

b. more than 15 billion

c. more than 10 billion

d. less than 2 billion

the graph drop down for both parts is either company x or y

Answer 1

Solution:-

Company Y

Small cap companies are the ones that are smaller in size at present but present opportunities of high growth potential owing to their small size. Therefore, based on this we arrive at the following options for company Y:

Company Y is a small cap stock company, a type known for growth spurts that can dramatically affect earnings and stock prices, and most of which hold the potential for relatively high risk.

Therefore, the correct options are 'd' and 'a' respectively.

Company X'

Large cap stocks are the ones that are large in size of their businesses and therefore, are more immune to competition and hence offer stable stream of cash flows with low operating risks. Also, the companies that have a market cap of more than 10 billion atre classified as large caps. Based on this, we conclude as under:

Company X is large cap stock, a type known for its low risk, high quality and market value of more than 10 billion.

Therefore, the correct options are 'd' and 'c'.

Identifying the stock charts:

• The stock represented by black line saw gradual and steady rise in its price followed by a humble fall and a good recovery. This represents low volatility and is a characteristic of a low risk large cap company. Therefore, the stock represented by black line is for company X
• As we can see that the stock represented by green line is the one that saw quick and steep rise in its price followed by a steep fall. In other words, this stock has high volatility which is a characteristic of a high-risk small cap stock. Therefore, the stock price reflected by green line is for company Y (as its a small cap company)

Cyclical stocks and recession:

Cyclical businesses are the ones that perform good or bad based on the prevailing economic conditions, i.e. if the economy is strong, GDP growth is high, the cyclical businesses would do well and vice-versa. The examples of cyclical industries would be infrastructure, steel, cement, iron, automobiles, etc. These are the type of businesses that should be avoided in times of recessions and economic slowdowns.

Therefore, the cyclical stocks perform very bad during recessions and are not a good strategy to avoid losses during recessionary times such as 2009. Hence, the statement made that cyclical stocks are an effective way to protection from losses in recessions like 2009 is incorrect and therefore FALSE.