Finance Interview Questions and Answers
Ques 16. Explain the concept of the risk-return tradeoff in investing.
The risk-return tradeoff is the principle that potential return increases with an increase in risk. Investors must balance the desire for higher returns with the acceptance of higher risk.
Example:
Investing in stocks has the potential for higher returns but also higher volatility and risk compared to investing in government bonds.
Ques 17. What is the difference between fiscal policy and monetary policy?
Fiscal policy involves government decisions on taxing and spending, while monetary policy is controlled by central banks and involves managing the money supply and interest rates.
Example:
If the government increases spending to stimulate economic growth, it is an example of fiscal policy.
Ques 18. Define the concept of arbitrage and provide an example.
Arbitrage is the practice of exploiting price differences for the same asset in different markets. An arbitrageur aims to profit from discrepancies in prices.
Example:
If a stock is trading at $50 on one exchange and $51 on another, an arbitrageur could buy on the lower-priced exchange and sell on the higher-priced exchange to make a profit.
Ques 19. What is the Modigliani-Miller theorem, and how does it relate to capital structure?
The Modigliani-Miller theorem states that, under certain assumptions, the value of a firm is unaffected by its capital structure. In other words, the mix of debt and equity financing does not impact the overall value of the company.
Example:
If a company increases its debt to fund projects, the Modigliani-Miller theorem suggests that the value of the company remains the same, assuming no taxes or bankruptcy costs.
Ques 20. Explain the concept of a derivative and provide examples of derivative instruments.
A derivative is a financial instrument whose value is derived from the value of an underlying asset. Examples include options, futures, and swaps.
Example:
An option to buy a stock at a specified price is a derivative instrument. Its value is derived from the price movements of the underlying stock.
Most helpful rated by users: