1.C Analytical Methods Flashcards
A company is considering two investment opportunities. Opportunity A has an internal rate of return (IRR) of 12%, while Opportunity B has an IRR of 8%. Which investment is more favorable from a time value of money perspective?
A) Opportunity A
B) Opportunity B
C) Both opportunities are equally favorable
D) It cannot be determined from the information provided.
Opportunity A
Explanation: A higher IRR indicates a more favorable investment opportunity, as it offers a higher return on investment.
1.C Analytical Methods
In a set of investment returns, which statistical measure provides the middle value when the data is arranged in ascending order?
A) Mean
B) Median
C) Mode
D) Range
Median
Explanation: The median is the middle value when data is arranged in ascending order, making it a measure of central tendency.
1.C Analytical Methods
A portfolio manager is analyzing the risk of a particular investment by examining its sensitivity to market movements. Which financial ratio is most relevant for this analysis?
A) Price-to-earnings ratio
B) Debt-to-equity ratio
C) Alpha
D) Beta
Beta
Explanation: Beta measures an investment’s sensitivity to market movements, indicating its risk relative to the market.
1.C Analytical Methods
Company X has a current ratio of 2.5, while Company Y has a current ratio of 0.8. Which company is better positioned to cover its short-term liabilities?
A) Company X
B) Company Y
C) Both companies are equally positioned
D) It cannot be determined from the information provided.
Company X
Explanation: A higher current ratio indicates better short-term liquidity and the ability to cover short-term liabilities.
1.C Analytical Methods
An investor is comparing two stocks. Stock A has a price-to-earnings (P/E) ratio of 15, and Stock B has a P/E ratio of 20. Which stock is relatively more expensive based on this information?
A) Stock A
B) Stock B
C) Both stocks are equally priced
D) It cannot be determined from the information provided.
Stock B
Explanation: A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings, making Stock B relatively more expensive.
1.C Analytical Methods
An investment has a net present value (NPV) of $5,000. What does this positive NPV indicate?
A) The investment is expected to generate a profit.
B) The investment is expected to generate a loss.
C) The investment’s future cash flows are uncertain.
D) The investment’s IRR is zero.
The investment is expected to generate a profit.
Explanation: A positive NPV indicates that the investment’s expected cash flows exceed the initial investment, resulting in a profit.
1.C Analytical Methods
When calculating the standard deviation of an investment’s returns, what does a higher standard deviation signify?
A) Lower investment risk
B) Higher investment risk
C) No relationship to investment risk
D) Uncertainty about the investment’s returns
Higher investment risk
Explanation: A higher standard deviation indicates greater variability in returns and, therefore, higher investment risk.
1.C Analytical Methods
Company Z has a debt-to-equity ratio of 0.75, while Company W has a debt-to-equity ratio of 1.2. Which company is more leveraged?
A) Company Z
B) Company W
C) Both companies have the same level of leverage
D) It cannot be determined from the information provided.
Company W
Explanation: A higher debt-to-equity ratio indicates more leverage, so Company W is more leveraged.
1.C Analytical Methods
An investor is interested in a portfolio’s historical risk-adjusted performance. Which ratio is most appropriate for assessing this?
A) Price-to-book ratio
B) Sharpe ratio
C) Quick ratio
D) Range
Sharpe ratio
Explanation: The Sharpe ratio measures the risk-adjusted performance of a portfolio, taking into account both returns and risk.
1.C Analytical Methods
A company’s stock has a price-to-book (P/B) ratio of 2.0, while its industry peers have an average P/B ratio of 1.5. What does this suggest about the company’s stock?
A) The stock is undervalued.
B) The stock is overvalued.
C) The stock is fairly valued.
D) The stock’s financial statements are unreliable.
The stock is overvalued.
Explanation: A higher P/B ratio compared to industry peers suggests that the stock may be overvalued relative to its book value.
1.C Analytical Methods
