5 questions across Easy, Medium, and Hard levels
P/E (Price-to-Earnings) ratio measures a company's current share price relative to earnings per share. Formula: P/E = Market Price per Share / Earnings per Share (EPS). A high P/E may indicate the stock is overvalued or investors expect high growth. A low P/E may suggest undervaluation. It varies significantly by industry.
Stocks represent ownership in a company (equity). Bondholders are creditors who lend money to the company (debt). Stocks offer higher potential returns but higher risk. Bonds provide fixed income with lower risk. Stock investors are last to be paid in bankruptcy; bondholders have priority. Stocks have no maturity date; bonds do.
DCF values a company by discounting its future cash flows to present value using a discount rate (usually WACC). Formula: DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n + Terminal Value/(1+r)^n. If DCF > current market price, the stock may be undervalued. Key inputs: revenue growth, margins, discount rate, terminal growth rate.
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operational profitability before capital structure and accounting decisions. It's used to compare profitability across companies and industries. EV/EBITDA is a popular valuation multiple. Limitations: ignores capex, working capital changes, and debt obligations.
The efficient frontier shows the set of optimal portfolios offering maximum expected return for each risk level. Steps: 1) Calculate expected returns and std dev for each asset. 2) Calculate correlation matrix. 3) Use mean-variance optimization to find portfolios minimizing variance for each return level. 4) Plot these portfolios - the upper-left boundary is the efficient frontier. Modern Portfolio Theory by Markowitz.