FA Capital Markets and Investment Analysis 2 — Questions and Answers
Question 1: What is the payback period for an investment?
- The time required to earn a positive NPV
- The time required to recover the initial investment from cash inflows (Correct answer)
- The time until the investment matures
- The time required to reach break-even sales volume
Correct answer: The time required to recover the initial investment from cash inflows
The payback period measures how long it takes for cumulative cash inflows from an investment to equal the initial cash outflow.
Question 2: Which market efficiency hypothesis states that all publicly available information is already reflected in stock prices?
- Weak Form Efficiency
- Semi-Strong Form Efficiency (Correct answer)
- Strong Form Efficiency
- Adaptive Market Hypothesis
Correct answer: Semi-Strong Form Efficiency
The semi-strong form of the Efficient Market Hypothesis holds that all publicly available information is instantly reflected in stock prices, making fundamental analysis unable to generate excess returns.
Question 3: Which risk cannot be eliminated through diversification?
- Unsystematic Risk
- Idiosyncratic Risk
- Systematic Risk (Correct answer)
- Specific Risk
Correct answer: Systematic Risk
Systematic (market) risk affects the entire market and cannot be diversified away, unlike unsystematic risk which is specific to individual securities.
Question 4: What does Beta measure in investment analysis?
- A stock's dividend yield relative to the market
- The sensitivity of a security's returns to overall market movements (Correct answer)
- A company's credit rating
- The volatility of a bond's duration
Correct answer: The sensitivity of a security's returns to overall market movements
Beta quantifies how much a stock's price tends to move relative to the market; a beta of 1.5 means the stock moves 50% more than the market.
Question 5: The Capital Asset Pricing Model (CAPM) is used to calculate:
- A company's weighted average cost of capital only
- The expected return on an asset given its systematic risk (Correct answer)
- The intrinsic value of a bond
- The optimal portfolio allocation
Correct answer: The expected return on an asset given its systematic risk
CAPM determines the expected return of an asset using the risk-free rate, the asset's beta, and the expected market risk premium.
Question 6: In a discounted cash flow (DCF) analysis, what is the terminal value?
- The initial investment amount
- The estimated value of all cash flows beyond the explicit forecast period (Correct answer)
- The residual value of depreciable assets
- The total debt outstanding at maturity
Correct answer: The estimated value of all cash flows beyond the explicit forecast period
Terminal value captures the present value of all cash flows after the explicit forecast period, often comprising the majority of total DCF value.
FA Capital Markets and Investment Analysis 2
What is the payback period for an investment?