Security Analysis - Placement Questions

Securities Trading:

1. What is Margin Trading?

 Margin trading refers to the process whereby individual investors buy more stocks
than they can afford to. A margin account provides the resources to buy more
quantities of a stock than investor can afford to buy with cash, at any point of time.
For this purpose, the broker would lend the money to buy shares and keep them as
collateral.
 While placing an order, investor is are required to pay an “Initial Margin” (IM),
which is a certain percentage of the total traded value pre-determined by the broker.
After a Margin Order is executed, Investor needs to always keep a “Maintenance
Margin”, (MM), which is the minimum amount of equity that an investor must
maintain in the margin account after the purchase has been made

2. Why is a demat account important in trading?

 The major objective behind opening a demat account is the safety of the essential
securities. There will be no risk of theft or fraud.
 Secondly, it is more convenient to have the securities in digital form i.e.
dematerialized form rather than conventional physical form.
 Thirdly, you can easily manage and monitor your trading performance through the
demat account.
 Finally, you can buy/sell any stock at any time and from anywhere without any long
paper process. You just require to follow simple and easy steps to transfer or receive
shares.

3. Is there any time for buying shares or doing a trade?

Normal Stock Market timings in India are between 9:15 AM to 03:30 PM. However, one can
also place orders through AMO (After Market Order)

4. What is the difference between a Limit Order and Market Order in Trading?
 Market orders are transactions meant to execute as quickly as possible at the current
market price.
 Limit orders set the maximum or minimum price at which you are willing to complete
the transaction, whether it be a buy or sell.
 Market orders offer a greater likelihood that an order will go through, but there are no
guarantees, as orders are subject to availability.

5. When purchasing a stock what charges are payable?

The charges that are payable while purchasing a stock are
 Stock Brokers Commission
 Stamp duty
 STT
 GST
 Cost of the stock

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6. What is “Over the Counter Market” in India?
Over-The-Counter Exchange of India (OTCEI) is an electronic stock exchange based in India
that consists of small- and medium-sized firms aiming to gain access to overseas capital
markets. There is no central place of exchange, and all trading occurs through electronic
networks (telephone, e-mail and proprietary electronic trading systems).
 The OTCEI facilitates smaller companies to raise capital, which they cannot do at the
national exchanges due to their inability to meet the exchange requirements.
 The OTCEI implements specific capitalization rules that make it suited for small- to
medium-sized companies while preventing larger companies from being listed.
 The key players in the OTCEI include brokers, market makers, custodians, and
transfer agents.

7. What do Stock Brokers and Sub-brokers do in The Securities Markets?

Stock brokers are registered trading members of stock exchanges. They sell new issuance of
securities to investors. They put through the buy and sell transactions of investors on stock
exchanges. All secondary market transactions on stock exchanges have to be conducted
through registered brokers.
Sub-brokers help in reaching the services of brokers to a larger number of investors. Several
brokers provide research, analysis and recommendations about securities to buy and sell, to
their investors. Brokers may also enable screen-based electronic trading of securities for their
investors, or support investor orders over phone. Brokers earn a commission for their
services.

8. What role do Merchant Bankers perform in Securities Markets?

Merchant bankers also called as issue managers, investment bankers, or lead managers help
an issuer access the security market with an issuance of securities. They evaluate the capital
needs, structure an appropriate instrument, get involved in pricing the instrument, and
manage the entire issue process until the securities are issued and listed on a stock exchange.
They engage other intermediaries such as registrars, brokers, bankers, underwriters and credit
rating agencies in managing the issue process.

9. What is the Role of Underwriters in the Securities Markets?

Underwriters are primary market specialists who promise to pick up that portion of an offer
of securities which may not be bought by investors. They serve an important function in the
primary market, providing the issuer the comfort that if the securities being offered do not
elicit the desired demand, the underwriters will step in and buy the securities. The specialist
underwriters in the government bond market are called primary dealers.

10. What are the Various Regulators of the Indian Securities Markets?

Securities and Exchange Board of India (SEBI): The Securities and Exchange Board of
India (SEBI), a statutory body appointed by an Act of Parliament (SEBI Act, 1992), is the
chief regulator of securities markets in India. SEBI functions under the Ministry of Finance.
The main objective of SEBI is to facilitate growth and development of the capital markets
and to ensure that the interests of investors are protected. The Securities Contracts Regulation
Act, 1956 is administered by SEBI. SEBI has codified and notified regulations that cover all
activities and intermediaries in the securities markets.
The Reserve Bank of India (RBI): The Reserve Bank of India regulates the money market
segment of securities market. As the manager of the government’s borrowing program, RBI
is the issue manager for the government. It controls and regulates the government securities

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market. RBI is also the regulator of the Indian banking system and ensures that banks follow
prudential norms in their operations. RBI also conducts the monetary, forex and credit
policies, and its actions in these markets influences the supply of money and credit in the
system, which in turn impact the interest rates and borrowing costs of banks, government and
other issuers of debt securities.

11. What are Zero Coupon Bonds?

A zero-coupon bond does not pay any coupons during the term of the bond. The bond is
issued at a discount to the face value, and redeemed at face value. The effective interest
earned is the difference between face value and the discounted issue price. A zero-coupon
bond with a long maturity is issued at a very big discount to the face value. Such bonds are
also known as deep discount bonds.

12. What are Floating Rate Bonds?

Floating rate bonds are instruments where the interest rate is not fixed, but re-set periodically
with reference to a pre-decided benchmark rate. For instance, a company can issue a 5-year
floating rate bond, with the rates being reset semi-annually at 50 basis points above the 1-
year yield on central government securities. Every six months, the 1-year benchmark rate on
government securities is ascertained from the prevailing market prices. The coupon rate the
company would pay for the next six months is calculated as this benchmark rate plus 50 basis
points.
Floating rate bonds are also known as variable rate bonds and adjustable rate bonds.

13. What are Callable Bonds and Puttable Bonds?

Callable bonds allow the issuer to redeem the bonds prior to their original maturity date.
Such bonds have a call option in the bond contract, which lets the issuer alter the tenor of the
security. For example, a 10-year bond may be issued with call options at the end of the 5th
year such as. Such options give issuers more flexibility in managing their debt capital. If
interest rates decline, an issuer can redeem a callable bond and re-issue fresh bonds at a lower
interest rate.
A Puttable bond gives the investor the right to seek redemption from the issuer before the
original maturity date. For example, a 7-year bond may have a put option at the end of the 5th
year. If interest rates have risen, Puttable bonds give investors the ability to exit from low-
coupon bonds and re-invest in higher coupon bonds.

14. What is a Follow-on Public Offer?

A follow-on public offer is made by an issuer that has already made an IPO in the past and
now makes a further issue of securities to the public. A company can make a further issue of
shares if the aggregate of the proposed issue and all the other issues made in a financial year
does not exceed 5 times the pre-issue net worth.
When a company wants additional capital for growth or to redo its capital structure by
retiring debt, it raises equity capital through a fresh issue of capital in a follow-on public
offer.

15. What is a ‘Green Shoe Option’?

The Green Shoe Option (GSO) in a public offer is used by companies to provide stability to
price of the share in the secondary market immediately on listing. A company, which opts for
Green Shoe option can allot additional shares not exceeding 15% of the issue size, to the
general public who have subscribed in the issue. The proceeds from this additional allotment

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will be kept in a separate bank account and used to buy shares in the secondary markets once
the shares are listed, in case the price falls below the issue price. This is expected to provide
support to the price of the shares. This price stabilization activity will be done by an entity
appointed for this purpose.

16. What are Exchange Traded Funds?

Exchange traded funds (ETF) are a type of mutual fund that combines features of an open-
ended fund and a stock
Features of ETF:
 Units are issued directly to investors when the scheme is launched.
 Post this period, units are listed on a stock exchange like a stock and traded.
 Units purchased at the time of launch or bought from the stock markets are credited to
the demat account of the investor.
 Transactions are done through brokers of the exchange. Investors need a broking
account and a demat account to invest in ETFs.
 The prices of the ETF units on the stock exchange will be linked to the NAV of the
fund, but prices are available on a real-time basis depending on trading volume on
stock exchanges.

17. What are Gold Exchange Traded Funds?

Gold Exchange Traded Funds (GETFs) are ETFs with gold as the underlying asset
Features:
 It provides a way to hold gold in electronic rather than in physical form
 Typically, each unit of ETF represents one gram of gold
 The fund holds physical gold and gold receipts representing the units issued
 Price of the units will move in line with the price of gold

18. What Do You Understand by Stock Market Indices? Name the Major Stock Market
Indices in India?
 Stock market indices are used to measure the general movement of the stock market.
It is used as a proxy for overall market movement. The major stock market indices
are:
 Bombay Stock Exchange Sensitive Index (BSE) popularly known as Sensex. It
reflects the movements of 30 sensitive shares from specified and non-specified
groups.
 S and P CNX nifty, known as Nifty 50 Index. It reflects the movements of 50 scrips
selected on the basis of market capitalization and liquidity.

19. What Do You Understand by Money Market? Give an Example.

Money market is the market where short-term instruments of credit with a maturity period of
one year or less than that are traded. Such instruments are known as near money. The
borrowers of money market are traders, government, speculators and lenders in this market
are commercial banks, central bank, financial institutions and insurance companies etc.

20. How is NIFTY 50 calculated?

NIFTY 50 indices are computed based on a float-adjusted and market capitalisation weighted
method. In this method, the level of index demonstrates the aggregate market value of stocks
present in the index in a specific base period.

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21. What is the settlement system currently followed by Stock Exchanges in India?
T + 2 basis rolling-settlement system; The transactions in the securities are settled 2 days
after the Trade Date
 A Settlement Cycle refers to a calendar according to which all purchase and sale
transactions done on T Day are settled on a T+2 basis.
 T = Trading Day and +2 means 2 consecutive working days after T (excluding all
holidays).

22. Who are Qualified Institutional Buyers?

Qualified Institutional Buyers (QIB) are those institutional investors who are generally
perceived to possess expertise and the financial muscle to evaluate and invest in the capital
markets.
Some Examples of ‘Qualified Institutional Buyer’ in India:
a. Public Financial Institutions
b. Mutual funds
c. Foreign Institutional Investors registered with SEBI
d. Venture capital funds registered with SEBI

23. What is Private Placement of Shares?

Private Placement” means any offer of securities (Not Only Shares) or invitation to subscribe
securities to a select group of persons by a company through issue of a private placement
offer letter

24. Explain the Terms “Block Deal” and “Bulk Deal”

Block Deal - Involves the sale of shares in a single transaction through a separate trading
window of a stock exchange.
 As per SEBI, this trading window is to be made available twice in a trading day for 15
minutes each as the ‘morning block deal window’ and as the ‘afternoon block deal
window’ by the stock exchange
 An order may be placed for a minimum quantity of 5 lakh equity shares or minimum
value of Rs 5 crore. Orders cannot be squared off or reversed.
 The price of a share ordered at the window should range within +1% to -1% of the
current market price/previous day's closing price, as applicable.
Every trade has to result in delivery and "Block Deal" orders cannot be squared off or
reversed
Upon completion of the sale, the stock exchange is required to publish certain details of the
transaction, such as the identity of the participants, quantity of shares traded and the trade
price.

Bulk Deal - Involves the sale of shares, through one or more transactions during a trading
day, such that the total quantity of shares traded is more than 0.5 per cent of the number of
shares of the company listed on the stock exchange.
 There is no restriction on the pricing of a bulk deal. However, the offer is placed in
the open market due to which any participant may have the opportunity of accepting
it.
 Bulk deals happen during normal trading window provided by the broker. The broker
who manages the bulk deal trade has to provide the details of the transaction to the
stock exchanges whenever they happen.

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  Unlike block deals, bulk deal orders are visible to everyone
Upon intimation by the brokers, the stock exchange is required to publish certain details of
the transaction, such as the identity of the participants, quantity of shares traded and the trade
price.

25. Who are Market Makers?

A Market Maker acts as both broker (on behalf of investor who wishes to execute orders) and
agent (brings buyers & seller together) in limited number of stocks
By taking opposite side of a trade when there are no other orders, Market Maker prevents
extreme price fluctuations / differences (speculative manipulation)

26. What is an “Offer for Sale”?

In an OFS, promoters of a company dilute their stake by selling their shares on an exchange
platform. Anyone including retail investors, companies, Foreign Institutional Investors (FIIs)
and Qualified Institutional Buyers (QIBs) can bid on these shares.
In an OFS, a buyer has to provide a bid in order to acquire the shares. The company sets a
‘floor price.’ Buyers cannot bid at a price below the floor price. Once the bids are placed,
shares are allocated to the different buyers. There is no minimum limit to participate in an
OFS. A buyer can bid for even a single share in the OFS process.

27. What is a Stop Loss order in Trading?

A Stop Loss order minimizes loss caused due to adverse movement of a stock’s price, versus
the trader’s expectation.
– Sell Stop Loss Order: In case of purchase, sell order will be executed, when Mkt Price
reaches price that is lower than purchase price, by certain %, in falling market, to limit further
loss
– Buy Stop Loss Order: In case of short sale, purchase order will be executed, if Mkt Price
goes above short sale price, by certain %, to limit losses on short sale

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Portfolio Diversification and Valuation:

1. What is CAPM and how is it related to WACC?

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between
the expected return   and risk of investing in a security. It shows that the expected return on a
security is equal to the risk-free return plus a risk premium, which is based on the beta of that
security. Below is an illustration of the CAPM concept.
CAPM is one of the methods of computing cost of equity which indicates the minimum
expected return of equity shareholders. Weighted average cost of capital is the minimum
expected return of fund contributors of all sources of finance such as preference shares, debt
capital, equity capital etc.

2. Limitations of Beta

The limitation of using beta is that it is based on historical data and may not necessarily be an
accurate predictor of future volatility. It is based on past data, so its use in predicting the
future assumes that the underlying company being charted remains unchanged.
In reality, a stock’s beta can rise or fall over a period of years, or change abruptly.
It is reliable only if the stock trades frequently.

3. Enterprise value and Market value

Market cap is the market value of a company’s stock. This financial metric assesses the value
of a business based solely on the stock. Therefore, to find the market cap of a company, one
can multiply the number of shares outstanding by the current share price of the stock.
Enterprise Value, on the other side, is a more comprehensive and alternative approach to
measuring a company’s total value. It takes into account various financial metrics such as
market capitalization, debt, minority interest, preferred shares, and total cash and cash
equivalents to arrive at the total value of a company. Although the minority interest and
preferred shares are most of the time kept on zero effectively, this may not be the case for
some companies.

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In simple words, enterprise value is the total price of buying a company as it calculates the
accurate value of a company.
The formula to calculate EV would be;
Enterprise Value = market value of common stock or market cap + market value of preferred
shares + total debt (including long and short-term debt) + minority interest – total cash and
cash equivalents.

4. Can Beta be negative?

Beta is slope coefficient. Beta can be negative, whenever the movements in stock price are in
opposite direction to the movement in market prices. A beta less than 0, which would indicate
an inverse relation to the market, is possible but highly unlikely. Some investors argue that
gold and gold stocks should have negative betas because they tend to do better when the
stock market declines.

5. How to calculate Beta?

Beta could be calculated by first dividing the security's standard deviation of returns by the
benchmark's standard deviation of returns. The resulting value is multiplied by the correlation
of the security's returns and the benchmark's returns. Alternately, it can be calculated by
regressing stock returns against benchmark’s returns or security risk premium against
benchmark risk premium.

6. What is SML and how is it different from CML?

Relationship between CML and SML

SML = Rf + β × (Rm-Rf)
β = Cov(m,p)/Var(m) i.e. [σm ×σp ×ρ(m,p)]/ [σm× σm]
Substitute β in SML equation,

Cov(m , p )
Beta=
Var m
σ m ×σ s × ρ(m , p)
i.e.
σm × σm

When σm in the numerator and denominator get cancelled,

σ s × ρ(m , p )
=
σm
σp
When ρ(m,s) is 1, the above formula gets reduced to
σm
σp
When β is substituted with in SML equation,
σm
σp
Rf + × (Rm-Rf) which is CML
σm

Thus, if a portfolio is perfectly positively correlated with market portfolio, SML and CML
are same.

S.No CML SML

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 1. Explains the relationship between the Explains the relationship between the
expected return of efficient portfolios and expected return of individual
their total risk (standard deviation) securities/ portfolios and their
systematic risk (beta)
2. X axis represents standard deviation and X axis represents beta and Y axis
Y axis represents expected return represents expected return
3. Considers only efficient portfolios Considers efficient and inefficient
portfolios/stocks

7. What is Sharpe ratio?

The ratio describes how much excess return you receive for the extra volatility you endure for
holding a riskier asset, as we need compensation for the additional risk you take for not
holding a risk-free asset.
Sharpe’s risk to variability ratio = Risk premium/SD of excess returns
or
Risk premium/SD returns
Risk Premium = Rm-Rf
If the risk-free rate is 5%, portfolio return and standard deviation are 13% and 11%,
respectively, the Sharpe ratio would be = (13-5)/11 = 0.73
Please note that standard deviation of excess returns also gives the same value as standard
deviation of returns in this case.

8. What are the various methods of valuation?

Balance sheet method:

• Book value method
• Liquidation value method
• Replacement cost method
Earnings multiple method:
• Price to earnings ratio
• Price to book value ratio
• Price to sales ratio
Discounted cash flow method:
• Dividend discount method
• Free cash flow method

9. What is P/E ratio? How to calculate it?

The Price Earnings Ratio (P/E Ratio) is the relationship between a company’s stock price and
earnings per share (EPS). It is a popular ratio that gives investors a better sense of the value
of the company. The P/E ratio shows the expectations of the market and is the price you must
pay per unit of current earnings  (or future earnings, as the case may be).
Earnings are important when valuing a company’s stock because investors want to know how
profitable a company is and how profitable it will be in the future. Furthermore, if the
company doesn’t grow and the current level of earnings remains constant, the P/E can be
interpreted as the number of years it will take for the company to pay back the amount paid
for each share.
P/E Ratio in Use
Looking at the P/E of a stock tells you very little about it if it’s not compared to the
company’s historical P/E or the competitor’s P/E from the same industry. It’s not easy to

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conclude whether a stock with a P/E of 10x is a bargain, or a P/E of 50x is expensive without
performing any comparisons.
The beauty of the P/E ratio is that it standardizes stocks of different prices and earnings
levels.
The P/E is also called earnings multiple. There are two types of P/E: trailing and forward.
The former is based on previous periods of earnings per share, while a leading or forward P/E
ratio is when EPS calculations are based on future estimates, which predicted numbers (often
provided by management or equity research).
Price Earnings Ratio Formula
P/E = Stock Price Per Share / Earnings Per Share
or
P/E = Market Capitalization / Total Net Earnings
or
Justified P/E = Dividend Payout Ratio / R – G
where;
R = Required Rate of Return
G = Sustainable Growth Rate
P/E Ratio Interpretation
The basic P/E formula takes the current stock price and EPS to find the current P/E. EPS is
found by taking earnings from the last twelve months divided by the weighted average shares
outstanding. Earnings can be normalized for unusual or one-off items that can impact
earnings abnormally. Learn more about normalized EPS. The justified P/E ratio is used to
find the P/E ratio that an investor should be paying for, based on the company’s dividend and
retention policy, growth rate, and the investor’s required rate of return. Comparing justified
P/E to basic P/E is a common stock valuation method.
Why Use the Price Earnings Ratio?
Investors want to buy financially sound companies that offer a good return on investment
(ROI). Among the many ratios, the P/E is part of the research for selecting stocks, because
we can figure out whether we are paying a fair price. Similar companies within the same
industry are grouped together for comparison, regardless of the varying stock prices.
Moreover, it’s quick and easy to use when we’re trying to value a company using earnings.
When a high or a low P/E is found, we can quickly assess what kind of stock or company we
are dealing with.
High P/E
Companies with a high Price Earnings Ratio are often considered to be growth stocks. This
indicates a positive future performance, and investors have higher expectations for future
earnings growth and are willing to pay more for them. The downside to this is that growth
stocks are often higher in volatility and this puts a lot of pressure on companies to do more to
justify their higher valuation. For this reason, investing in growth stocks will more likely be
seen as a risky investment. Stocks with high P/E ratios can also be considered overvalued.
Low P/E
Companies with a low Price-Earnings Ratio are often considered to be value stocks. It means
they are undervalued because their stock price trade lower relative to its fundamentals. This
mispricing will be a great bargain and will prompt investors to buy the stock before the
market corrects it. And when it does, investors make a profit as a result of a higher stock
price. Examples of low P/E stocks can be found in mature industries that pay a steady rate of
dividends.

10. What is weighted average cost of capital? How to calculate it?

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A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital
across all sources, including common shares, preferred shares, and debt.  The cost of each
type of capital is weighted by its percentage of total capital and they are added together. This
guide will provide a detailed breakdown of what WACC is, why it is used, how to calculate
it, and will provide several examples.
WACC = (E/V x ke) +((D/V x kd) x (1 – T))
Where:
E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
ke = cost of equity (required rate of return)
kd = cost of debt (yield to maturity on existing debt)
T = tax rate
An extended version of the WACC formula is shown below, which includes the cost of
Preferred Stock (for companies that have it).
The purpose of WACC is to determine the cost of each part of the company’s capital
structure based on the proportion of equity, debt, and preferred stock it has. Each component
has a cost to the company. The company pays a fixed rate of on its debt and a fixed yield on
its preferred stock. Even though a firm does not pay a fixed rate of return on common equity,
it does often pay dividends in the form of cash to equity holders.
The weighted average cost of capital is an integral part of a DCF valuation and, thus, it is an
important concept to understand for finance professionals, especially for investment.

11. How do you calculate Equity Beta and Asset Beta?

Unlevered beta (Asset Beta) is the beta of a company without the impact of debt. It is also
known as the volatility of returns for a company, without taking into account its financial
leverage. It compares the risk of an unlevered company to the risk of the market. It is also
commonly referred to as “asset beta” because the volatility of a company without any
leverage is the result of only its assets.
Unlevered (BU) = BL / (1+D/E(1-T))
Levered beta (or “equity beta”) is a measurement that compares the volatility of returns of a
company’s stock against those of the broader market. In other words, it’s a measure of risk
and it includes the impact of a company’s capital structure and leverage. Equity beta allows
investors to gauge how sensitive a security might be to macro-market risks.
Levered beta (BL) = BU × (1+ D/E (1-T))
BU = Unlevered beta
D/E = Debt equity ratio
T= Tax rate
Unlevered beta: explains only business risk or the risk associated with assets
Levered beta: explains both business risk and financial risk.

12. What is Economic Value Added (EVA) and how it is different from Profitability?
Economic Value Added (EVA) or Economic Profit is a measure based on the Residual
Income technique that serves as an indicator of the profitability of projects undertaken. Its
underlying premise consists of the idea that real profitability occurs when additional wealth is
created for shareholders and that projects should create returns above their cost of capital.
EVA adopts almost the same form as residual income and can be expressed as follows:
EVA = NOPAT – (WACC * capital invested)           

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Where NOPAT = Net Operating Profits After Tax
NOPAT = Operating Income × (1−Tax Rate)
where: Operating Income=Gross profits less operating expenses
Capital invested = Equity + long-term debt at the beginning of the period
and (WACC* capital invested) is also known as finance charge
Accounting profit is known as net income and is a company's revenue minus all of its
explicit costs.

13. What is valuation, Types of Valuation and types of ratios?

Valuation refers to the process of determining the present value of a company or an asset. It
can be done using a number of techniques. Analysts that want to place value on a company
normally look at the management of the business, the prospective future earnings, the market
value of the company’s assets, and its capital structure composition.
There are two main types of valuation multiples:
a. Equity Multiples
b. Enterprise Value Multiples
a. Equity multiples
Investment decisions make use of equity multiples especially when an investor aspires for
minority positions in companies. The list below shows some common equity multiples used
in valuation analyses.
 P/E ratio– the most commonly used equity multiple; needed data is easily accessible;
computed as the proportion of Share Price to Earnings Per Share (EPS)
 Price/Book Ratio – useful if assets primarily drive earnings; computed as the
proportion of Share Price to Book Value Per Share
 Dividend Yield – used for comparisons between cash returns and investment types;
computed as the proportion of Dividend Per Share to Share Price
 Price/Sales – used for firms that make losses; used for quick estimates; computed as
the proportion of Share Price to Sales (Revenue) Per Share
However, a financial analyst must take into account that companies have varying levels of
debt that ultimately influence equity multiples.
b. Enterprise Value (EV) multiples
When decisions are about mergers and acquisitions, enterprise value multiples are the
appropriate multiples to use. The list below shows some common enterprise value multiples
used in valuation analyses.
 EV/Revenue – slightly affected by differences in accounting; computed as the
proportion of Enterprise Value to Sales or Revenue.
 EV/EBITDAR – most used in industries in the hotel and transport sectors; computed
as the proportion of Enterprise Value to Earnings before Interest, Tax, Depreciation &
Amortization, and Rental Costs
 EV/EBITDA – EBITDA can be used as a substitute of free cash flows; most used
enterprise value multiple; computed as the proportion of Enterprise Value to
Enterprise Value / Earnings before Interest, Tax, Depreciation & Amortization
 EV/Invested Capital – used for capital-intensive industries; computed as the
proportion of Enterprise Value to Invested Capital

14. Minimum Variance Portfolio

A minimum variance portfolio is a collection of securities that combine to minimize the price
volatility of the overall portfolio.
Variance of a portfolio is the function of three factors:
i) Proportion of investment (weights)
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ii) Risks measured by standard deviation or variance
iii) Coefficient of correlation between the assets
Since factors (ii) and (iii) are not under the control of investors, investor may put an effort to
minimize the risk of the portfolio by investing in such proportions (weights) that risk is
minimized. Hence, in minimum variance portfolio weights are computed.

15. Efficient Frontier

An efficient frontier is a set of investment portfolios that are expected to provide the highest
returns at a given level of risk. A portfolio is said to be efficient if there is no other portfolio
that offers higher returns for a lower or equal amount of risk. Where portfolios are located on
the efficient frontier depends on the investor’s degree of risk tolerance.
The efficient frontier is a curved line. It is because every increase in risk results in a smaller
amount of returns. In other words, there is a diminishing marginal return to risk, and it results
in a curvature.

16. EIC Approach in Fundamental Analysis

This is also known as the Economy-Industry-Company or the EIC approach wherein the
analyst starts analyzing the economy at large and delving down further into the relevant
sector and then the company in particular. ... Then he picks up the stocks from that industry
and follows the same approach for valuing the stocks.

17. What is Risk?

Investment risk is the idea that an investment will not perform as expected, that its actual
return will deviate from the expected return. Risk is measured by the amount of volatility,
that is, the difference between actual returns and average (expected) returns. This difference
is referred to as the standard deviation. Returns with a large standard deviation (showing the
greatest variance from the average) have higher volatility and are the riskier investments.
The two major components of risk include systematic risk and unsystematic risk, which
when combined results in total risk. The systematic risk is a result of external and
uncontrollable variables, which are not industry or security specific and affects the entire
market leading to the fluctuation in prices of all the securities. On the other hand,
unsystematic risk refers to the risk which emerges out of controlled and known variables, that
are industry or security specific.
Systematic risk cannot be eliminated by diversification of portfolio, whereas the
diversification proves helpful in avoiding unsystematic risk.

18. Active Management Vs. Passive Management

Active Management: It is an attempt to find out mispriced securities and time the market
• Stock Selection (Micro asset allocation): Allocation of funds for investment in the
same asset class. Ex: investment in equity shares of different companies.
• Market Timing: Rebalancing the portfolio by timing the market. It involves inclusion
of high beta (high volatile) stocks in the portfolio when the market is expected to go
up and low beta (low volatile) stocks in the portfolio when the market is expected to
go down.
Passive Management: It involves holding a highly diversified portfolio which resembles an
index: Ex: holding the stock in Sensex, Nifty 50 etc. In passive management, no attempt is
made to find undervalued securities and to time the market.

19. Free Cash Flows to Firm Vs. Free Cash Flows to Equity

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There are two types of Free Cash Flows: Free Cash Flow to Firm (FCFF) (also referred to as
Unlevered Free Cash Flow) and Free Cash Flow to Equity (FCFE), commonly referred to as
Levered Free Cash Flow.
The key difference between Unlevered Free Cash Flow and Levered Free Cash Flow is that
Unlevered Free Cash Flow excludes the impact of interest expense and net debt issuance
(repayments), whereas Levered Free Cash Flow includes the impact of interest expense and
net debt issuance (repayments).

20. Operating cash flow Vs. Free cash flow

Operating cash flow measures cash generated by a company's business operations and
implies investors whether a company has enough cash flow to pay their bills.
Free cash flow is the cash that a company generates from its business operations after
subtracting capital expenditures and implies investors and creditors that there's enough cash
remaining to pay back creditors, pay dividends, and buyback shares.

Technical Analysis:

1. Relative Strength Index:

Relative Strength Index (RSI) is a measure of momentum against itself.
Average of Upward Price Change
Relative Strength (RS) =
Average of Downward Price Change

100
Relative Strength Index (RSI) = 100 -
1+ RS

2. Stochastic Oscillator:
C−L
%K = x100
H−L
Where,
C is the latest closing price
H is the highest high during the last N trading days
L is the lowest low during the last N trading days

3. What is the basic argument of stochastics?

When stock prices increase, the closing prices have a tendency to be closest to the peaks.

4. When a line is formed in between a primary bear trend, what is it called?

Accumulation

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5. When a line is formed in between a primary bull trend, what is it called?
Distribution

6. If prices continue to fall after an accumulation, what does it indicate?

Consolidation of the bearish trend.

7. What happens to the price during the distribution stage in the stock movements?
There is no steep rise or fall in prices.

8. What is the most reliable and widely used pattern for trend reversals?
Head and Shoulders

9. What happens if a vertical rally or a decline is interrupted by a consolidation pattern

akin to a rectangle?
It leads to a flag formation

10. What happens to prices after a flag formation?

The prices move in the same direction

11. What does ‘breakaway gaps’ indicate?

They emphasize the bearishness or bullishness of a breakout

12. What are ‘exhaustion gaps’?

They represent gaps occurring before a trend ends, or gaps that precede the last leg of a
bullish or a bearish trend.

13. What is the price at which technical analyst would expect the supply to be nil below
that price?
Support level price

14. What is the price at which technical analyst would expect the demand to be nil
above that price?
Resistance level price

15. What is breadth in technical analysis?

The quality of price change is measured by studying whether a change in trend spreads across
most sectors and industries, or is concentrated in a few scrips.

16. What are the three movements as per Dow theory?

Major trends (Primary movements)
Intermediate trends (Secondary movements)
Short-run movements (Minor movements)

17. What does O-H-L-C stand for in charting techniques?

Open-High-Low-Close

18. What does long white/green candlesticks indicate?

Strong buying pressure

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19. What does long black/red candlesticks indicate?
Strong selling pressure

20. What is a ‘Marubozu’?

A candle stick which do not have upper or lower shadows. Also the high and low are
represented by the open or close.

21. What does a white/green Marubozu indicate?

It is formed when the open equals the low and the close equals the high. This indicates that
buyers controlled the price action from the first trade to the last trade.

22. What does a black/red Marubozu indicate?

It is formed when the open equals the high and the close equals the low. This indicates that
sellers controlled the price action from the first trade to the last trade.

23. What does ‘Moving Average Convergence and Divergence (MACD)’ measure?
It is an oscillator which measures momentum

24. How is typical MACD line calculated?

12-day EMA minus 26-day EMA

25. What is the signal line in typical MACD plotting?

9-day EMA

26. What are ‘Fibonacci Retracements’?

They are ratios used to identify potential reversal levels

27. What are the most popular Fibonacci Retracements?

61.8%, 38.2% and 23.6%

Efficient Market Hypothesis:

1. What is the major feature of an efficient market?

Securities’ prices quickly and fully reflect all available information.

2. Which form of market efficiency incorporates price and volume information?

Weak form market efficiency

3. Which form of market efficiency is most related to random walk hypothesis?

Weak form market efficiency

4. Which is the type of studies are frequently used to test the semi-strong form of the EMH?
Event Studies

5. What are the various tests of semi-strong form efficiency?

- Stock splits
- Accounting changes
- Dividend announcements
- Quarterly Results Announcements

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