MCQs- CHAPTER 13: LEGAL AND REGULATORY ENVIRONMENT

The Treynor Ratio measures the risk premium earned per unit of Bet

Annualized return converts the return to a uniform period, enabling comparison between investments with different holding periods.

The time frame typically used for calculating the stock turnover ratio is one year.

Interest rates and bond prices have an inverse relationship. When interest rates fall, or are expected to fall, bond prices go up. Conversely, when interest rates rise, or are expected to rise, bond prices decline. This relationship exists because investors demand a higher return for taking on the risk of holding a bond when interest rates are higher, and vice vers

The Sharpe Ratio measures the risk premium earned per unit of standard deviation.

When interest rates rise, the price of bonds typically falls. This is because existing bonds with lower interest rates become less attractive compared to newly issued bonds with higher interest rates, leading to a decrease in demand for existing bonds and a corresponding decrease in their price.

Confirmation bias leads to searching, interpreting, or prioritizing information that confirms one's beliefs or hypotheses.

The EV to Capital Employed ratio is calculated by dividing the enterprise value by the capital employed, which is the sum of total equity and total debt.

The Net Asset Value (NAV) approach considers the market value of assets minus the value of liabilities in valuation. It differs from the book value approach by using market values of assets rather than their historical cost.

Valuations in the new age economy and businesses often utilize unconventional parameters such as eyeballs, page reviews, footfall, average revenue per user (ARPU), and the number of users. These parameters are used to justify the high valuations seen in these industries. However, it is important to note that ultimately these parameters should translate into profits for owners in the long run. The valuations may be sustained based on market belief and investor interest, but without profitability, they can be susceptible to a downturn, as seen during the dot-com boom in 2000-2001.

The main objective of stock exchanges is to provide liquidity, which refers to the ease of buying and selling shares in the market.

The Net Asset Value (NAV) approach is commonly used in industries such as Real Estate, Shipping, Aviation, and others that are highly asset-oriente

A higher Jensen's Alpha indicates superior performance.

The main measure of liquidity in the traded value turnover ratio is the traded value of the shares.

The EV to Capital Employed ratio and Return on Capital Employed (ROCE) are used together to assess the return on invested capital and facilitate investment decision making. The EV to Capital Employed ratio helps determine the market value of assets relative to the capital employed, while ROCE evaluates the profitability of the business. By considering both ratios, investors can gauge the adequacy of the return on capital investe

According to "The Checklist Manifesto," errors of ignorance are mistakes made out of ignorance, while errors of ineptitude are mistakes made because of incorrect use of knowledge. The other options mentioned are either incorrect or not related to the distinction made in the book.

Quantitative parameters considered under quantitative analysis in an investment research checklist include equity history, revenue growth, leverage ratio, return track record, dividend track record, cash flows, et The other options are either incorrect or related to different types of parameters.

Business risk is indeed also known as operating risk, as it is caused by factors that affect the company's operations.

Reinvestment risk arises from the probability that income flows received from an investment may not be able to earn the same interest as the original interest rate. It occurs when intermediate cash flows may be reinvested at a lower return compared to the original investment. Reinvestment rates can be high or low depending on the levels of interest rates at the time when the coupon income is receive

When valuing a business with high earning power, an important consideration is the Return on Equity (ROE). In such cases, the book value (BV) of shares becomes less important compared to the profitability and return generated by the business. ROE reflects the return on the capital invested by shareholders and is a more relevant measure in assessing the value of the business in this scenario.

Qualitative parameters that can be included in an investment research checklist include understanding the business, details of technology collaboration, revenue model, competitive advantage, risks, quality of management, et The other options are either incorrect or related to different types of parameters.

A good research report should possess qualities such as clarity of idea, simplicity of delivery, presenting the argument clearly, and a narrative structure. The option "Create customized reports according to the reader type" is not mentioned in the provided information.

Looking at consolidated numbers in valuation allows for the evaluation of the financial performance of the entire group or conglomerate. It provides a holistic view that includes the results of all the business units and subsidiaries under the umbrella of the company. This helps in assessing the overall financial health, profitability, and value of the company as a whole.

CAGR is computed using the formula: (End Value / Beginning Value)^(1/n) - 1, where n is the holding period in years.

The calling feature in bonds is most prevalent when interest rates are expected to fall.

ROI for a single period is calculated as net profit divided by the investment, multiplied by 100.

Using a checklist approach in investment research reports helps avoid lazy mistakes or short-cuts, ensures disciplined decision-making, and helps in objective and facts-based decisions. The other options mentioned are either incorrect or not related to the advantages of using a checklist approach.

Ownership bias, also known as the endowment effect, reflects the tendency to place a higher value on a position than others woul

The Price/Adjusted book value ratio considers the fair value of assets minus the fair value of liabilities, taking into account off-balance sheet items as well. It provides a valuation metric that factors

Sharpe Ratio factors in the difference in risk by measuring the risk premium earned per unit of standard deviation.

Reinvestment risk increases when interest rates fall because the reinvestment of periodic cash flows at lower rates will result in lower returns.

Anchoring bias is a cognitive bias where individuals rely too heavily on the first piece of information offered when making decisions. Investors may hold on to outdated information, ignoring new information that is available. This bias can impact decision-making, such as holding on to losing stocks in expectation of a price rebound based on past prices, rather than considering current information.

Call risk refers to the possibility that a debt security will be called prior to its maturity. It is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them with issues with lower interest rates. Call risk usually goes hand in hand with reinvestment risk.

CAGR (Compounded Annual Growth Rate) is the accepted standard measure of return in financial markets.

Herd mentality is a bias where investors follow the investment choices made by others, often due to a belief that others may have better information. This behavior can lead to bubbles and crashes in the market.

The Price/Embedded value ratio measures the relationship between the market price and the present value of expected net future cash flow (adjusted for probability) from the policies currently in force for life insurance businesses. This ratio is specifically used in the case of the life insurance industry to assess the value based on embedded value.

Confirmation bias, also called my side bias, is the tendency to search for, interpret, or prioritize information in a way that confirms one's beliefs or hypotheses.

Dividend is indeed a small component of the total returns from equity.

Stock turnover ratio is calculated by dividing the number of shares traded during a given period by the number of outstanding free float shares.

The Sum-Of-The-Parts (SOTP) valuation method involves valuing each business separately and then adding the individual valuations to arrive at the total value of a company. This method is used when a company operates multiple businesses under one umbrella, such as conglomerates. Each business vertical is treated as an independent entity and valued separately, and the valuations are then summed up to determine the total value of the company.

The gambler's fallacy is the mistaken belief that if something happens more frequently than normal during some period, then it will happen less frequently in the future, or vice versa, based on past events.

The EV to Capital Employed ratio measures the relationship between enterprise value and the total capital employed, which includes both equity and debt.

Jensen's Alpha refers to the excess return earned on investment compared to its benchmark.

The price-to-earnings (P/E) ratio is calculated by dividing the current price of the stock by the earnings per share (EPS). It indicates how much investors are willing to pay for each unit of earnings generated by the company.

Country risk refers to the risk related to a country as a whole, where the country may not be able to honor its financial commitments. When a country defaults on its obligations, it can affect the performance of all other securities issued in that country as well as other countries with relations to it. Country risk applies to all types of securities issued in that country.

Traded value turnover ratio measures the liquidity of a stock by dividing the traded value of the shares by the market capitalisation of the company.

Leverage ratio is a quantitative parameter of business analysis. Qualitative parameters focus on non-numeric aspects, while quantitative parameters involve numerical analysis.

Compounded return (CAGR) takes into consideration the time value of money and assumes reinvestment of periodic returns.

The investor expects both to preserve the capital invested and earn a return from the investment.

Valuation is considered a subjective exercise because the inputs required for valuation, such as earnings, assets, and growth projections, are subjective in nature and can vary based on individual judgment and assumptions. Additionally, valuation is not a timeless concept and can change dramatically if the circumstances of a business change. It is influenced by various factors, making it subjective rather than a precise and objective measure. Complicated quantitative models may provide a false impression of preciseness, but ultimately valuation remains a subjective process.

Systematic risk, also known as undiversifiable risk, refers to risks that impact multiple investment categories and cannot be eliminated through diversification. It is caused by factors that affect the economy or markets as a whole, such as changes in government policy, external factors, wars, or natural calamities. Inflation risk, exchange rate risk, interest rate risk, and reinvestment risk are examples of systematic risks.

Liquidity risk refers to the absence of liquidity in an investment. It implies that the investor may not be able to sell their investment when desired, or they may have to sell it below its intrinsic value, or incur high costs to carry out transactions. Investments in assets such as corporate bonds, property, and art are subject to liquidity risk, as finding a buyer and determining the price can be a lengthy process in the absence of an active market.

The Treynor Ratio calculates the risk premium per Bet

Political risk refers to the risk associated with unfavorable government actions such as nationalization, changes in tax structures, or licensing regulations. Businesses and securities are exposed to political risk because governments have the power to change laws that affect them. Political risk can have a significant impact on the performance of businesses and securities.

The major sections of a research report include company business, peer group analysis, shareholding pattern, key strengths, key concerns, industry overview, company fundamentals, key financial indicators, and financials. The other options are either incorrect or not related to the major sections.

The demand and supply of securities in the market is not a valuation parameter for business analysis. The other options mentioned are commonly used valuation parameters.

When assessing the return on capital (ROCE) and return on equity (ROE), it is important to focus on the variations between these two ratios. ROCE reflects the true return on the capital invested in the business, while ROE can be manipulated by high leverage. Wide variations between ROCE and ROE may indicate potential issues or the need for further investigation into the financial performance and capital structure of the company.

Relative valuation is used to compare the value of assets by looking at how the market prices similar/comparable assets. It provides an estimate of value based on the pricing of similar assets, which can be helpful in determining whether something is cheap or expensive.

Annual reports are considered an authentic source for analysts to check facts on a company. Research reports, media reports, and business portals can provide additional information but may not be as authoritative as the annual reports.

Projection bias refers to projecting recent past experiences or events into the distant future, ignoring the distant past. It involves giving more weight to recent events and not considering historical patterns or trends.

Valuation parameters in an investment research checklist are used to assess the business's intrinsic value, determine market mispricing, and justify the margin of safety. The other options are either incorrect or not related to the purpose of considering valuation parameters.

Herd Mentality bias can prevent investors from benefiting from market corrections.

Market risk refers to the risk of the loss of value in an investment due to adverse price movements in the market. The price of an asset responds to information that impacts its intrinsic value. For example, changes in interest rates or currency exchange rates can affect the market price of bonds or stocks. Market risk primarily affects investments in marketable securities such as equity, bonds, gold, real estate, et

ROI numbers should be used with caution for investments with unknown future returns and for equity and mutual funds.

Credit risk, also known as default risk, refers to the possibility that a bond issuer will not be able to make expected interest rate payments and/or principal repayment. Debt instruments are subject to credit risk as they have pre-committed payouts. The credit rating provided by credit rating agencies is used to measure the credit risk in an instrument. A lower credit rating represents a higher credit risk, resulting in higher interest rate expectations by investors.

Stock turnover ratio is calculated using the number of shares traded divided by the number of outstanding free float shares.

Fact-based sections in a research report are typically filled using information from annual reports, quarterly reports, and calculations. The other options mentioned are not related to fact-based sections.

Inflation risk represents the risk that the money received on an investment may be worth less when adjusted for inflation. It arises from the decline in the value of security's cash flows due to the falling purchasing power of money. It is highest in fixed return instruments such as bonds, fixed deposits, and debentures, where investors are paid a fixed periodic interest and returned the principal amount at maturity. Inflation risk is relatively less for equity shares.

The prevalent recommendations used by research analysts to rate stocks are Buy, Overweight, Hold, Underweight, and Sell. The other options mentioned are not related to stock ratings.

Loss-aversion bias refers to an investor's tendency to strongly prefer avoiding losses to acquiring gains, and the fear of loss leads to inaction.

Both amortization of capital expenses and depreciation are non-cash charges. They represent the allocation of expenses over time and do not involve the actual outflow of cash. Interest on foreign exchange borrowing, on the other hand, represents an actual cash expense.

Unsystematic risk, also known as diversifiable risk, refers to risks that are specific to individual securities or

The winner's curse refers to the tendency to ensure winning a competitive bid even after overpaying for the asset. While it may be a behavioral win, financially it may result in a loss.

The earnings yield is calculated by dividing the earnings per share (EPS) by the price of the stock and expressing the result as a percentage. In this case, the earnings yield would be (13 / 195) * 100 = 6.67 percent.

Some potential reasons for failure of a research report include unnecessary details, long sentences, no proper structure, inconsistent views, and complex language. The other options are either incorrect or not mentioned as reasons for failure.

The Capital Asset Pricing Model (CAPM) is used to estimate the expected return on investment by considering the risk associated with an asset or security. It helps in determining the appropriate rate of return required by an investor to compensate for the level of risk. The model takes into account factors such as the risk-free rate, beta (systematic risk), and the expected market return to calculate the expected return on an investment.

Business risk, also known as operating risk, is the risk inherent in the operations of a company. It is caused by factors that affect the company's operations, such as the cost of raw materials, employee costs, introduction and position of competing products, marketing and distribution costs, et Holding a diversified portfolio is an efficient way to diversify this risk.

If a stock has exceeded its target price, an analyst may recommend selling the stock. Buying or holding the stock would not be appropriate when the target price has been surpasse

For a private owner, EV (Enterprise Value) represents the true value of the firm. Unlike market capitalization, which only considers the equity value, EV takes into account both the equity and debt of the company. It provides a comprehensive measure of the company's value from the perspective of a private owner.