Investment Market Analysis and Valuation 1 — Questions and Answers
Question 1: What does the Price-to-Earnings (P/E) ratio measure?
- The total revenue of a company divided by earnings per share
- The market price of a stock relative to its earnings per share, indicating how much investors pay for each dollar of earnings (Correct answer)
- The percentage of earnings paid out as dividends
- The ratio of debt to equity on a company's balance sheet
Correct answer: The market price of a stock relative to its earnings per share, indicating how much investors pay for each dollar of earnings
The P/E ratio divides a company's stock price by its earnings per share, showing how much investors are willing to pay for each dollar of earnings — a higher P/E may indicate growth expectations or overvaluation.
Question 2: What is fundamental analysis?
- Using past price charts and trading volume to predict future stock movements
- Evaluating a company's intrinsic value by analyzing financial statements, management, competitive position, and economic factors (Correct answer)
- Using computer algorithms to execute trades automatically
- Calculating the mathematical average of a stock's historical prices
Correct answer: Evaluating a company's intrinsic value by analyzing financial statements, management, competitive position, and economic factors
Fundamental analysis involves studying a company's financial health, earnings, revenue, assets, liabilities, management quality, and industry conditions to determine its true intrinsic value.
Question 3: What is technical analysis?
- Examining corporate earnings reports to identify undervalued stocks
- Using historical price movements, charts, and trading volume to forecast future stock price direction (Correct answer)
- Analyzing a company's technology assets and patents
- Evaluating the technical skills of a company's management team
Correct answer: Using historical price movements, charts, and trading volume to forecast future stock price direction
Technical analysis uses price charts, trading volume, and statistical indicators to identify patterns and trends that may predict future stock price movements.
Question 4: What is the Price-to-Book (P/B) ratio?
- A company's stock price divided by its annual revenue
- A stock's market price compared to the company's book value per share (assets minus liabilities) (Correct answer)
- The ratio of the stock price to the number of books published by the company
- A measure of how quickly a company's inventory turns over
Correct answer: A stock's market price compared to the company's book value per share (assets minus liabilities)
The P/B ratio compares a company's market value to its book value, helping investors identify whether a stock may be undervalued (below 1) or overvalued relative to its net assets.
Question 5: What is earnings per share (EPS)?
- The total profit a company made in the current quarter
- A company's net profit divided by the number of outstanding shares, showing profit attributed to each share (Correct answer)
- The percentage of revenue a company retains after paying expenses
- The amount of dividends paid per share each year
Correct answer: A company's net profit divided by the number of outstanding shares, showing profit attributed to each share
EPS is calculated by dividing a company's net income by its total outstanding shares, providing a per-share measure of profitability used widely in stock valuation.
Question 6: What is a bull market?
- A market in which stock prices are falling by more than 20%
- A market characterized by rising stock prices, strong investor confidence, and economic growth expectations (Correct answer)
- A market that experiences extreme volatility and frequent swings
- A market that only trades commodity futures and livestock
Correct answer: A market characterized by rising stock prices, strong investor confidence, and economic growth expectations
A bull market is a sustained period of rising asset prices — commonly defined as a 20% or more rise from recent lows — driven by investor optimism and positive economic outlook.
Investment Market Analysis and Valuation 1
What does the Price-to-Earnings (P/E) ratio measure?