Equity Investments Flashcards

An analyst calculates a stock's intrinsic value at $50 but it trades at $60. The stock appears to be:

Answer: Overvalued; the analyst should recommend a sell or avoid

When market price exceeds intrinsic value, the stock is overvalued and a sell (or underweight) recommendation is appropriate.

Which of the following is MOST consistent with value investing as described in the CFA curriculum?

Answer: Seeking stocks with low price multiples relative to fundamentals

Value investing seeks stocks trading at a discount to intrinsic value, typically characterized by low P/E, low P/B, or high dividend yields.

In equity analysis, a company's economic moat refers to:

Answer: Its sustainable competitive advantages that protect long-term profitability

An economic moat represents durable competitive advantages (e.g., brand, network effects, cost advantages) that allow a company to maintain above-average profitability over time.

A stock's required rate of return using the CAPM is most directly impacted by a change in:

Answer: The stock's beta coefficient

In CAPM, required return = risk-free rate + beta × equity risk premium; beta is the key company-specific variable that directly affects the required return.

Global Depositary Receipts (GDRs) allow US investors to:

Answer: Invest in foreign companies through US-listed instruments denominated in USD

GDRs (including ADRs for US markets) are bank-issued certificates representing shares of foreign companies, traded on US exchanges in USD, simplifying foreign equity access.

Which measure is MOST useful for comparing the operating profitability of two companies with different capital structures and tax rates?

Answer: EBIT margin

EBIT margin removes the effects of interest expense (capital structure) and taxes, making it the most comparable operating profitability metric across companies with different structures and jurisdictions.