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33 multiple-choice questions and 21 flashcards on Equity Investments, about 8% of the CFA Level I bank. Every one carries a written rationale.
Equity Investments is one of 10 chapters in CoStudy's CFA Level I bank, and it holds 33 of the bank's 401 multiple-choice questions — roughly 8% of the total. That proportion is not arbitrary: chapters follow the certifying body's published exam outline, and the number of questions in each is set by that domain's published weight, so the share of your practice time this chapter takes matches the share of the real exam it accounts for.
Studying by chapter is worth doing once you have a diagnostic score. A single overall percentage tells you whether you are close; it does not tell you which domain is dragging. Working a weak chapter in isolation, and re-testing it in isolation, is the fastest way to move a score that has stalled — and it is why the mock exams in CoStudy report by domain rather than as one number.
10 questions drawn from this chapter, with the full rationale shown — the controlling principle behind the right answer, and why each wrong option tempts and fails.
Under the CAPM, the only risk priced in expected return is:
Answer: C — Systematic risk, measured by the asset's beta
A) That is the input to the Sharpe ratio, not CAPM. B) Idiosyncratic risk is diversifiable and unpriced. C) Correct — only systematic risk (beta) earns a premium. D) That is a post-modern portfolio theory measure.
A stock with a P/E of 15 and expected earnings growth of 12% per year has a PEG ratio approximately equal to:
Answer: D — 1.25, computed as the P/E divided by the earnings growth rate expressed in percentage-point terms
A) Uses the reciprocal, giving 12/15 = 0.80 by mistake. B) Divides growth by P/E, inverting the definition. C) Multiplies rather than divides. D) Correct — 15 ÷ 12 = 1.25 by convention.
A stock's P/E ratio is 20 and earnings grow at 5% per year. What is the PEG ratio?
Answer: A — 4.0
A) Correct — PEG = 20 / 5 = 4.0, expensive relative to growth. B) Inverts the ratio (5/20). C) Uses growth alone, ignoring P/E. D) Multiplies instead of dividing (20 × 5).
Efficient Market Hypothesis (EMH) forms:
Answer: A — Weak, semi-strong, and strong forms
A) Correct — Fama's three forms cover past, public, and all information. B) Ignores Fama's tiered framework. C) Strong form only, empirically refuted. D) Contradicts substantial efficiency evidence.
A passive investor who holds a broad market index fund for the long run is MOST closely aligned with:
Answer: C — A belief that actively picked securities will not, on average, beat the broad market net of costs and fees
A) That is the philosophy indexing rejects. B) Concentration is inconsistent with broad indexing. C) Correct — indexing follows EMH logic and cost drag on active managers. D) Timing is inconsistent with buy-and-hold indexing.
A firm with sustainable ROE of 15% and a retention ratio of 60% has a sustainable growth rate of:
Answer: C — 9% sustainable growth rate per year
A) Uses ROE × payout instead of ROE × retention. B) Uses ROE alone with no retention adjustment. C) Correct — g = ROE × b = 0.15 × 0.60 = 9%. D) Uses ROE/retention ratio incorrectly.
A firm's leading P/E exceeds its trailing P/E. The MOST likely reason is:
Answer: B — Expected next-year earnings are lower than trailing
A) Higher forward EPS would lower leading P/E. B) Correct — a smaller denominator raises leading P/E. C) Price affects both ratios similarly. D) Payout ratio does not change P/E arithmetic.
Equity valuation via Dividend Discount Model (DDM, Gordon Growth):
Answer: A — V equals D1 divided by (r minus g)
A) Correct — Gordon Growth constant-growth DDM formula. B) DDM is derived, not arbitrary. C) That describes an earnings-multiple approach. D) That describes a book-value model.
Private equity investments are MOST likely characterized by:
Answer: D — Long lockups, J-curve returns, and use of fund leverage
A) Public equities, not PE, have daily liquidity and low fees. B) Illiquid holdings are valued periodically, not continuously. D) Correct — PE features illiquidity, J-curve, leverage, and 2/20 fee economics. C) Passive index tracking is a public-market strategy.
Margin requirements when buying stock:
Answer: D — Initial and maintenance margin under Reg T
A) Ignores the availability of margin loans. B) 10% is not the Reg T standard. C) Regulators and brokers set margin, not buyers. D) Correct — Reg T sets initial (50%) and maintenance (25%).
4 cards from the 21 in this chapter.
What is enterprise value to EBITDA (EV/EBITDA)?
A capital structure-neutral valuation multiple. Lower EV/EBITDA may indicate undervaluation. Useful for comparing companies with different leverage.
What is the efficient market hypothesis?
Asset prices reflect available information. Weak: past prices. Semi-strong: all public info. Strong: all info including private.
What is multi-stage DDM?
Uses different growth rates for different periods (high growth, transition, stable). More realistic for companies with changing growth profiles.
What is the H-model?
A DDM variant assuming growth declines linearly from a high rate to a long-run stable rate. V₀ = D₀[(1+gL) + H(gS−gL)] / (r−gL).
These are a sample. The full Equity Investments chapter runs 54 items with per-chapter progress tracking, on the web and in the iOS app.