Chapter 2

The Education of Warren Buffett

Answers to Multiple-Choice Questions

1. B. Benjamin Graham wrote Security Analysis with David Dodd in 1934 and wrote The Intelligent Investor in 1949.

2. C. Prior to the Securities Act of 1933 and the Securities Exchange Act of 1934, corporate information was totally inadequate. Before these laws were enacted, corporate misinformation was often misleading and used to manipulate security prices.

3. A. The other sentences do make sense in the investing world, but “A well-chosen diversified portfolio of common stocks, based on reasonable prices, can be a sound investment” sums up the core philosophy spelled out in Security Analysis.

4. D. Graham defines safety of principal as not being absolute, but an investment should be safe from loss under reasonable conditions.

5. B. Graham spelled out the thorough analysis of investments as the careful study of available facts with the attempt to draw conclusions based on established principles and sound logic. This analysis is a three-step function—descriptive, critical, and selective.

6. C. Bonds were considered safe investments until the Dow Jones Bond Average declined from 97.70 to 65.78 between 1929 and 1932.

7. B. Before Security Analysis was published, there was very little work done in the area of quantitatively selecting stocks. By outlining a way to value a company, Graham put in place the framework to approach purchasing a stock as more of a long-term investment as opposed to pure speculation ...

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