1. What is the primary purpose of investment analysis?
a) To determine the best time to sell an investment
b) To evaluate the potential return and risk of an investment
c) To track historical stock prices
d) To analyze market trends only
Answer: b) To evaluate the potential return and risk of an investment
2. What does “risk-return tradeoff” mean in investment analysis?
a) Higher risk investments always provide higher returns
b) Lower risk investments always provide higher returns
c) The relationship between the potential return of an investment and its risk
d) Risk and return are unrelated in investment decisions
Answer: c) The relationship between the potential return of an investment and its risk
3. Which financial metric is commonly used to assess the profitability of an investment?
a) Price-to-Earnings (P/E) Ratio
b) Dividend Yield
c) Return on Investment (ROI)
d) Market Capitalization
Answer: c) Return on Investment (ROI)
4. What is “net present value” (NPV) in investment analysis?
a) The current value of future cash flows minus the initial investment cost
b) The future value of the initial investment
c) The total return from an investment
d) The average return rate over the investment period
Answer: a) The current value of future cash flows minus the initial investment cost
5. What is the purpose of using “discounted cash flow” (DCF) analysis?
a) To estimate the future value of an investment
b) To evaluate the present value of future cash flows
c) To calculate the historical return on an investment
d) To assess the risk of market fluctuations
Answer: b) To evaluate the present value of future cash flows
6. What does “diversification” mean in the context of investment strategy?
a) Investing all funds in a single asset class
b) Spreading investments across various asset classes to reduce risk
c) Focusing solely on high-risk investments
d) Timing the market to maximize returns
Answer: b) Spreading investments across various asset classes to reduce risk
7. What is “beta” in investment analysis?
a) A measure of an investment’s total return
b) A metric indicating the volatility of an investment relative to the market
c) The initial investment cost
d) The average dividend yield
Answer: b) A metric indicating the volatility of an investment relative to the market
8. What is “asset allocation” in investment management?
a) The process of selecting specific stocks to invest in
b) The distribution of investments across different asset categories, such as stocks, bonds, and cash
c) The strategy of timing market entries and exits
d) The method of evaluating individual stock performance
Answer: b) The distribution of investments across different asset categories, such as stocks, bonds, and cash
9. What does the term “liquidity” refer to in investment analysis?
a) The potential for an investment to generate high returns
b) The ease with which an investment can be converted into cash without significantly affecting its value
c) The total value of an investment portfolio
d) The risk associated with an investment
Answer: b) The ease with which an investment can be converted into cash without significantly affecting its value
10. What is “capital gain”?
a) The profit earned from selling an investment at a higher price than its purchase price
b) The interest income earned from an investment
c) The dividend paid on an investment
d) The cost of acquiring an investment
Answer: a) The profit earned from selling an investment at a higher price than its purchase price