CISI IAD Advanced Investment Analysis 2

Question 1

What is 'technical analysis' in investment management?

Accepted Answer

The study of historical price and volume data to identify patterns and predict future price movements

Answer

Technical analysis uses charts of historical price and trading volume data to identify patterns, trends, and signals that analysts believe can predict future price movements. It contrasts with fundamental analysis, which focuses on intrinsic value.

Question 2

What is the 'enterprise value' (EV) of a company?

Accepted Answer

The total value of a company, including equity market capitalisation plus net debt (or minus net cash), representing the theoretical takeover price

Answer

Enterprise value = market capitalisation + debt - cash. It represents the total value of the business regardless of its capital structure, making it useful for comparing companies with different debt levels. It is often used in the EV/EBITDA valuation multiple.

Question 3

What does the 'price-to-book' (P/B) ratio measure?

Accepted Answer

The ratio of a company's market capitalisation to the book value (net assets) of its equity — indicating how much investors are willing to pay over the net asset value

Answer

The P/B ratio compares the market's valuation (share price) to the accounting book value of equity (assets minus liabilities per share). A P/B below 1 may indicate an undervalued company; a high P/B implies investors expect high future returns on equity.

Question 4

What is a 'free cash flow' (FCF) yield?

Accepted Answer

Free cash flow (operating cash flow minus capex) divided by the market capitalisation, expressed as a percentage

Answer

FCF yield = free cash flow / market capitalisation. Free cash flow is the cash generated after capital expenditure — it is the cash available to return to shareholders via dividends or buybacks. A high FCF yield may indicate an undervalued company generating strong cash returns.

Question 5

What is 'quantitative easing' (QE) and how does it affect financial markets?

Accepted Answer

A central bank policy of purchasing financial assets (typically government bonds) to inject liquidity into the financial system, typically depressing bond yields and supporting asset prices

Answer

QE involves the central bank (e.g., Bank of England) creating money electronically to buy assets — primarily government bonds. This pushes up bond prices (depressing yields) and encourages investors to move into higher-risk assets, supporting equity and property prices.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Advanced Investment Analysis 2