Valuation Signals
This valuation ratio compares a stock’s price to its annual earnings. A high value often signals the stock may be expensive relative to peers. It also can also suggest overvaluation or high growth potential.
P/E ratio
This is the single most important profitability metric and measures profit relative to shareholder investment.
Return on Equity (ROE)
If a stock’s price has been steadily rising for several weeks, this is generally called what type of momentum?
Upward momentum (or “a positive trend”)
This measure tells us how sensitive a stock is to market movements. (How much systematic risk a stock contributes)
Beta
Your portfolio has no exposure to healthcare. Adding a healthcare stock would improve this.
Diversification
A stock’s P/E is 40% above its 5-year median. What is the likely portfolio action?
Name one red flag in a company’s balance sheet that might trigger a sell.
high leverage, falling cash balance, or negative working capital
A stock that keeps hitting new 52-week highs is usually showing what kind of signal?
Bullish momentum
Beta = 1.6 for a stock in your portfolio. What does that imply?
The stock is significantly more volatile than the market
Holding too much of one sector increases this type of risk.
Concentration Risk
A stock trades at a price-to-sales ratio of 2.5, while its industry average is 1.2. What does this likely imply for portfolio action?
Consider trimming or selling due to relative overvaluation
If a company’s revenue is growing but gross margin is falling, what might that indicate?
Rising costs or weakening pricing power
You observe unusually large call option volume on a stock. What might that signal for sentiment?
Bullish / Rising Sentiment
Give one example of a macro risk that affects financial and tech stocks differently.
Interest rates, inflation, recession, etc.
Your portfolio already owns several stocks that tend to move in the same direction at the same time. Adding another similar stock will reduce what key benefit?
Diversification
If a stock’s PEG ratio > 2.0, this typically means what about valuation?
Overvalued relative to growth.
EPS has grown for 8 straight quarters. What is the likely portfolio action?
Buy or increase position.
If a stock falls sharply on very high trading volume, what does that usually indicate about investor sentiment?
Strong negative sentiment
If the portfolio is overweight consumer discretionary heading into a recession, what action should you take?
Reduce cyclical exposure / sell / rebalance
Your portfolio is heavily invested in high-growth tech stocks, and you add a steady dividend-paying utility stock. What benefit does this bring to the portfolio?
more diversification (or “more balance”)
A company’s stock price has been flat for a year, but its earnings have grown 25% and its P/E ratio is now well below the industry average. What does this likely indicate?
The stock may be undervalued and could be a buy or increase position
A company’s debt-to-equity ratio has doubled in two years while earnings have stayed flat. What does this signal about its risk?
Increasing financial risk
A stock suddenly jumps 10% in one day after positive news, and trading volume is much higher than normal. What does this combination typically signal?
Strong bullish momentum
A company has 45% of revenue from China, and new tariffs are announced. What is the likely portfolio action?
Sell or reduce position due to geopolitical risk
A stock in your portfolio has grown so much that it now makes up a much larger percentage of your total value than originally planned. What is the strategic action often used to control this?
Rebalancing