Finance Interview Questions and Answers
Ques 21. What is the difference between systematic risk and unsystematic risk?
Systematic risk, also known as market risk, affects the entire market and cannot be diversified away. Unsystematic risk is specific to a particular company or industry and can be reduced through diversification.
Example:
The 2008 financial crisis is an example of systematic risk affecting global markets.
Ques 22. Explain the concept of hedging in finance.
Hedging is a risk management strategy used to offset potential losses in one investment by taking an opposite position in another security or derivative. It helps protect against adverse market movements.
Example:
A company might hedge against currency risk by using financial instruments to offset potential losses due to exchange rate fluctuations.
Ques 23. What is the Gordon Growth Model, and how is it used in equity valuation?
The Gordon Growth Model, or Dividend Discount Model, is used to estimate the intrinsic value of a stock based on expected future dividends. It assumes a constant growth rate in dividends.
Example:
If a stock pays an annual dividend of $2, and the investor expects a constant growth rate of 5%, the Gordon Growth Model values the stock at $40 ([$2 / (0.05)]).
Ques 24. Define the term 'liquidity ratio' and provide examples.
Liquidity ratios measure a company's ability to meet short-term obligations. Examples include the current ratio and the quick ratio.
Example:
If a company has current assets of $500,000 and current liabilities of $300,000, the current ratio is 1.67 ($500,000 / $300,000).
Ques 25. What is the role of the Securities and Exchange Commission (SEC) in financial markets?
The SEC is a regulatory agency that oversees and enforces securities laws in the United States. It aims to protect investors, maintain fair and efficient markets, and facilitate capital formation.
Example:
The SEC reviews financial disclosures from publicly traded companies to ensure they comply with regulations and provide accurate information to investors.
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