Valuation & CAPM
What is the CAPM formula for expected return?
E(Ri) = Rf + beta * (Rm - Rf)
What does CDS stand for in credit markets?
Credit Default Swap
What are the three main financial statements?
Balance Sheet, Income Statement, Cash Flow Statement
What does ROE stand for?
Return on Equity
What is an ETF?
Exchange-Traded Fund
Calculate the expected return if Rf is 3%, Beta is 1.2, and Market Risk Premium is 7%.
11.4% (3 + 1.2*7)
What is the relationship between bond prices and market interest rates?
Inverse relationship
Which statement shows a company's financial position at a specific point in time?
Balance Sheet
Formula for the Current Ratio.
Current Assets / Current Liabilities
What is the main difference between an ETF and a Mutual Fund regarding trading?
ETFs trade on an exchange like stocks throughout the day; Mutual Funds trade once at EOD NAV.
A stock has a beta of 1.5. If the market rises by 10%, what is the expected excess return over the risk-free rate?
15% (1.5 * 10%)
Define a CDO and its primary purpose.
Collateralized Debt Obligation; used to pool assets and tranched into different risk levels.
Define 'Working Capital' and its formula.
The capital used in day-to-day operations; Current Assets - Current Liabilities.
What ratio measures a firm's ability to pay interest on its debt?
Interest Coverage Ratio (EBIT / Interest Expense)
Define 'Tracking Error' in index investment.
The standard deviation of the difference between the returns of the portfolio and the benchmark index.
According to the Dividend Growth Model, what is the price of a stock with a $2 dividend next year, 5% growth, and 10% required return?
$40 (2 / (0.10 - 0.05))
Calculate the value of a zero-coupon bond with $1000 face value, 5 years to maturity, and a 6% discount rate.
$747.26 (1000 / (1.06^5))
Explain 'Reverse Analysis' in the context of financial statement analysis.
Starting with the stock price to determine what performance (growth/margins) is 'priced in' by the market.
Describe the role of credit rating agencies in the application of credit ratings.
Assessing the creditworthiness of issuers and debt instruments to provide independent risk signals to investors.
Explain 'Passive Management' in the context of Indexing.
An investment strategy that aims to replicate the performance of a specific index rather than outperform it.
Explain the 'Clean Surplus' relation in residual earnings valuation.
Net dividends equal comprehensive income minus the change in book value of equity.
What is 'Modified Duration' and how does it relate to bond price sensitivity?
It measures the percentage change in price for a 1% change in yield: %dP = -Dmod * dy.
How does an impairment of goodwill affect the three financial statements?
Income Statement: Expense; Balance Sheet: Reduces Assets/Equity; Cash Flow: No impact (non-cash).
Decompose ROE using the 3-step DuPont Analysis.
ROE = Profit Margin * Asset Turnover * Equity Multiplier
What is 'Sampling' in the context of building an index ETF?
Buying a representative subset of securities in an index to track its performance without owning every single component.