Finance Interview Questions and Answers
Ques 26. Explain the concept of the time-weighted rate of return (TWR) in investment performance measurement.
The time-weighted rate of return measures the compound rate of growth in a portfolio, removing the impact of external cash flows. It provides an accurate representation of the investment manager's performance.
Example:
If an investment grows by 5% in the first quarter and 10% in the second quarter, the time-weighted rate of return for the half-year period is [(1 + 0.05) * (1 + 0.10) - 1].
Ques 27. What are the key differences between a bull market and a bear market?
A bull market is characterized by rising asset prices, optimism, and investor confidence. A bear market is marked by falling prices, pessimism, and widespread selling.
Example:
During a bull market, investors may be more willing to take risks and buy stocks. In a bear market, investors may seek safer assets like bonds or cash.
Ques 28. Define the term 'real options' in investment decision-making.
Real options are opportunities to make decisions during a project's life that can alter the project's cash flows and risk. They add flexibility to investment strategies and can enhance value.
Example:
The option to expand a manufacturing facility if market conditions improve is an example of a real option in business investment.
Ques 29. Explain the concept of the efficient frontier in portfolio theory.
The efficient frontier represents the set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of return. It is a key concept in modern portfolio theory.
Example:
By diversifying a portfolio with assets that have low correlation, an investor can achieve a more efficient risk-return profile.
Ques 30. What is the Black-Scholes-Merton model, and how does it calculate the theoretical price of options?
The Black-Scholes-Merton model is an extension of the Black-Scholes model that considers the impact of dividends and the risk-free rate. It calculates the theoretical price of options using factors like stock price, option strike price, time to expiration, volatility, dividends, and risk-free interest rate.
Example:
The Black-Scholes-Merton model is widely used to determine the fair market value of options and guide option pricing.
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