Finance Interview Questions and Answers
Ques 6. What is the efficient market hypothesis (EMH)?
EMH states that all available information is already reflected in a security's price. Therefore, it's impossible to consistently achieve higher-than-average returns by analyzing the market.
Example:
If a stock's price quickly adjusts to new information, it supports the efficient market hypothesis.
Ques 7. Explain the concept of beta in the context of investments.
Beta measures a stock's volatility in relation to the market. A beta of 1 means the stock tends to move with the market, while a beta above 1 indicates higher volatility.
Example:
A stock with a beta of 1.5 is expected to move 1.5 times more than the market.
Ques 8. What is the weighted average cost of capital (WACC)?
WACC is the average rate of return a company is expected to pay to its investors, including shareholders and debtholders. It's calculated by weighting the cost of equity and debt.
Example:
If a company has a cost of equity of 10% and a cost of debt of 5%, and the debt-to-equity ratio is 2:1, the WACC is 8.33%.
Ques 9. Describe the differences between financial accounting and managerial accounting.
Financial accounting focuses on external financial reporting for investors and regulators, while managerial accounting provides information for internal decision-making by management.
Example:
Preparing financial statements for shareholders is an example of financial accounting, while creating a budget for a department is an example of managerial accounting.
Ques 10. What is the Black-Scholes Model and how is it used?
The Black-Scholes Model is a mathematical model for calculating the theoretical price of European-style options. It considers factors like stock price, option strike price, time to expiration, volatility, and risk-free interest rate.
Example:
The Black-Scholes Model is commonly used by options traders to estimate the fair market value of options.
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