Topic 4: Equities: Markets and Valuations

Question 1

What is equity or common stock?

Answer 1

Ownership interest in a company, with residual claim on profits and voting rights.

Question 2

What is limited liability in equity?

Answer 2

Shareholders’ losses are limited to their investment amount.

Question 3

What is the ‘top-down’ analysis approach in equity valuation?

Answer 3

Starting from macroeconomic environment analysis, moving to sector/industry analysis, then to firm-level.

Question 4

What are key macroeconomic indicators?

Answer 4

GDP growth, employment, inflation, interest rates, exchange rates.

Question 5

What is a leading economic indicator?

Answer 5

Indicators that predict future economic activity, like the yield curve or PMI.

Question 6

What is sector rotation?

Answer 6

Shifting investments between sectors based on the business cycle phase.

Question 7

What is the Efficient Market Hypothesis (EMH)?

Answer 7

The idea that asset prices fully reflect all available information.

Question 8

What are the forms of EMH?

Answer 8

Weak form, Semi-strong form, Strong form.

Question 9

What does the weak form of EMH state?

Answer 9

Current prices reflect all past trading information.

Question 10

What does the semi-strong form of EMH state?

Answer 10

Current prices reflect all publicly available information.

Question 11

What does the strong form of EMH state?

Answer 11

Current prices reflect all public and private (insider) information.

Question 12

What is intrinsic value?

Answer 12

The true, fundamental value of an asset based on underlying characteristics.

Question 13

What is market mispricing?

Answer 13

A situation where market price deviates from intrinsic value.

Question 14

What is a random walk in stock prices?

Answer 14

The idea that price changes are unpredictable and follow no pattern.

Question 15

What are absolute valuation models?

Answer 15

Models that estimate intrinsic value, like discounted cash flow (DCF) models.

Question 16

What are relative valuation models?

Answer 16

Models that compare value using multiples like P/E or P/B ratios.

Question 17

What is the Dividend Discount Model (DDM) formula?

Answer 17

P0 = D1 / (r - g)

Question 18

What is a P/E ratio?

Answer 18

Price per share divided by earnings per share.

Question 19

What is a P/B ratio?

Answer 19

Price per share divided by book value per share.

Question 20

What is dividend yield?

Answer 20

Annual dividends per share divided by the stock price.

Question 21

What are common valuation techniques?

Answer 21

Financial statement analysis, comparables, and discounting methods.

Question 22

What is the purpose of comparables in valuation?

Answer 22

Comparing a firm to peers to assess relative value.

Question 23

What are the three main financial statements?

Answer 23

Balance Sheet, Income Statement, Cash Flow Statement.

Question 24

What is shown on the Balance Sheet?

Answer 24

A firm’s assets, liabilities, and shareholders’ equity.

Question 25

What is the Income Statement used for?

Answer 25

Measuring a firm's revenues, expenses, and net income.

Question 26

What does the Cash Flow Statement show?

Answer 26

The cash inflows and outflows from operations, investing, and financing.

Question 27

What is the 'going concern' assumption?

Answer 27

The assumption that a company will continue operating into the foreseeable future.

Question 28

What is liquidation value?

Answer 28

The value of a firm's assets if it were immediately sold off.

Question 29

What is the purpose of financial ratio analysis?

Answer 29

To evaluate a company's performance and financial health.

Question 30

What is quality of earnings?

Answer 30

The degree to which earnings are derived from sustainable business operations.

Question 31

What are common anomalies challenging EMH?

Answer 31

January effect, Monday effect, end-of-quarter effect.

Question 32

What is passive investing?

Answer 32

Buying a market index fund to match market returns, not beat them.

Question 33

What is an active investment strategy?

Answer 33

Attempting to outperform the market through stock selection or market timing.

Question 34

What is a fairness opinion?

Answer 34

An independent opinion about whether a merger or acquisition deal is financially fair.

Question 35

What are sources of financial data for valuation?

Answer 35

Company reports (10-Ks), Morningstar, financial news services.

Question 36

What are behavioral biases that affect investment decisions?

Answer 36

Overconfidence, herd behavior, anchoring, loss aversion.

Question 37

What is the significance of the yield curve in economics?

Answer 37

It reflects investor expectations about future interest rates and economic activity.

Question 38

What is sector sensitivity to the business cycle?

Answer 38

Cyclical sectors perform well in booms, defensive sectors perform better in recessions.

Question 39

What is the purpose of sensitivity analysis?

Answer 39

To examine how changes in key assumptions impact valuation results.

Question 40

What is the sum-of-the-parts valuation?

Answer 40

Adding up the values of a firm's distinct business segments or assets.