CFA Level I Equity Investments top 100 questions
1. What fundamental right do common shareholders typically possess?
Answer: Voting rights in the company.
2. What is the order of claim on a company's assets in case of liquidation?
Answer: Secured creditors, unsecured creditors, preferred stockholders, common
stockholders.
3. What is preferred stock? Answer: A class of stock that has preference over
common stock in terms of dividends and asset distribution upon liquidation.
4. Do preferred stockholders typically havea voting rights? Answer: Generally,
no.
5. What is the dividend discount model (DDM) primarily used for? Answer:
Valuing equity based on the present value of its future dividends.
6. What is the formula for the Gordon Growth Model (constant growth
DDM)? Answer: P0 = D1 / (r - g), where P0 is the current price, D1 is the
expected dividend next period, r is the required rate of return, and g is the constant
dividend growth rate.
7. What are the key assumptions of the Gordon Growth Model? Answer:
Dividends grow at a constant rate forever, and the required rate of return (r) is
greater than the growth rate (g).
, 8. What is the difference between D0 and D1 in the DDM? Answer: D0 is the
dividend just paid, while D1 is the expected dividend next period (D1 = D0 * (1 +
g)).
9. What are some limitations of the Gordon Growth Model? Answer: It
assumes a constant growth rate, which may not be realistic for many companies,
and it is not applicable to companies that do not pay dividends or have unstable
growth.
10. What is a multistage dividend discount model? Answer: A DDM that allows
for different dividend growth rates over different periods.
11. What are the two main components of an investor's required rate of
return on equity? Answer: The risk-free rate and the equity risk premium.
12. What does the Capital Asset Pricing Model (CAPM) estimate? Answer:
The required rate of return on equity.
13. What is the formula for CAPM? Answer: r_e = R_f + β_e (E(R_m) - R_f),
where r_e is the required rate of return on equity, R_f is the risk-free rate, β_e is
the beta of the equity, and E(R_m) - R_f is the market risk premium.
14. What does beta measure? Answer: The systematic risk (non-diversifiable
risk) of a security relative to the overall market.
15. A beta of 1.0 indicates what? Answer: The security's price tends to move with
the market.
16. A beta greater than 1.0 indicates what? Answer: The security's price
movements are amplified compared to the market.
1. What fundamental right do common shareholders typically possess?
Answer: Voting rights in the company.
2. What is the order of claim on a company's assets in case of liquidation?
Answer: Secured creditors, unsecured creditors, preferred stockholders, common
stockholders.
3. What is preferred stock? Answer: A class of stock that has preference over
common stock in terms of dividends and asset distribution upon liquidation.
4. Do preferred stockholders typically havea voting rights? Answer: Generally,
no.
5. What is the dividend discount model (DDM) primarily used for? Answer:
Valuing equity based on the present value of its future dividends.
6. What is the formula for the Gordon Growth Model (constant growth
DDM)? Answer: P0 = D1 / (r - g), where P0 is the current price, D1 is the
expected dividend next period, r is the required rate of return, and g is the constant
dividend growth rate.
7. What are the key assumptions of the Gordon Growth Model? Answer:
Dividends grow at a constant rate forever, and the required rate of return (r) is
greater than the growth rate (g).
, 8. What is the difference between D0 and D1 in the DDM? Answer: D0 is the
dividend just paid, while D1 is the expected dividend next period (D1 = D0 * (1 +
g)).
9. What are some limitations of the Gordon Growth Model? Answer: It
assumes a constant growth rate, which may not be realistic for many companies,
and it is not applicable to companies that do not pay dividends or have unstable
growth.
10. What is a multistage dividend discount model? Answer: A DDM that allows
for different dividend growth rates over different periods.
11. What are the two main components of an investor's required rate of
return on equity? Answer: The risk-free rate and the equity risk premium.
12. What does the Capital Asset Pricing Model (CAPM) estimate? Answer:
The required rate of return on equity.
13. What is the formula for CAPM? Answer: r_e = R_f + β_e (E(R_m) - R_f),
where r_e is the required rate of return on equity, R_f is the risk-free rate, β_e is
the beta of the equity, and E(R_m) - R_f is the market risk premium.
14. What does beta measure? Answer: The systematic risk (non-diversifiable
risk) of a security relative to the overall market.
15. A beta of 1.0 indicates what? Answer: The security's price tends to move with
the market.
16. A beta greater than 1.0 indicates what? Answer: The security's price
movements are amplified compared to the market.
