CMA Final Strategic Financial Management Flashcards

24 sample cards from the Strategic Financial Management deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is sensitivity analysis as a risk analysis technique?

   A 'what-if' technique that changes one key input variable at a time (e.g., sales, cost, life) to see how sensitive the project's NPV/outcome is to that variable, identifying the most critical variables.

2. What is scenario analysis in risk evaluation?

   Evaluating project outcomes (e.g., NPV) under a few internally consistent combinations of variables—typically pessimistic, most-likely and optimistic scenarios—rather than changing one variable at a time.

3. What is the certainty equivalent approach to risk?

   Risky expected cash flows are converted into their certain (risk-free) equivalents using a certainty-equivalent coefficient (0–1), and these are then discounted at the risk-free rate.

4. What is the risk-adjusted discount rate (RADR) method?

   A method that adds a risk premium to the risk-free rate so that riskier projects are discounted at higher rates; RADR = risk-free rate + risk premium, then NPV is computed using this rate.

5. What is Monte Carlo simulation in risk analysis?

   A computer technique that assigns probability distributions to uncertain input variables and runs many random trials to generate a probability distribution of possible outcomes (e.g., NPV).

6. What does a decision tree help analyse?

   Sequential decisions under uncertainty—it graphically maps decision nodes, chance events with probabilities and outcomes, allowing computation of expected values to choose the optimal path.

7. How is the standard deviation used to measure risk of returns?

   It measures the dispersion of possible returns around the expected return; a higher standard deviation indicates greater variability and hence greater (total) risk.

8. What is the coefficient of variation and why is it used?

   CV = standard deviation / expected return. It measures risk per unit of return, allowing comparison of risk between investments with different expected returns; lower CV is preferred.

9. What is Value at Risk (VaR)?

   A statistical measure estimating the maximum potential loss on a portfolio over a given time horizon at a specified confidence level (e.g., 95% or 99%).

10. What is hedging as a risk mitigation strategy?

    Taking an offsetting position—often using derivatives such as forwards, futures, options or swaps—to reduce or eliminate the risk of adverse price, rate or currency movements.

11. Name the four common risk-response strategies.

    Risk avoidance, risk reduction/mitigation, risk transfer (e.g., insurance, hedging), and risk retention/acceptance.

12. What is diversification as a risk mitigation strategy?

    Spreading investments across different assets, sectors or markets whose returns are not perfectly correlated, so that unsystematic risk is reduced as losses in some are offset by gains in others.

13. What is fundamental analysis?

    A method of evaluating a security's intrinsic value by analysing economic, industry and company factors (financials, management, prospects) to decide whether it is under- or over-valued.

14. What are the three levels of the E-I-C framework in fundamental analysis?

    Economy analysis (macro factors), Industry analysis (industry life cycle, competition), and Company analysis (financials, management, products)—the top-down approach.

15. State the dividend discount (Gordon) model for the intrinsic value of a share.

    P0 = D1 / (Ke - g), where D1 is the expected next-year dividend, Ke is the required return on equity, and g is the constant dividend growth rate (valid when Ke > g).

16. How is the Price-Earnings (P/E) ratio calculated and interpreted?

    P/E = Market price per share / Earnings per share. It shows how much investors pay per rupee of earnings; a high P/E may indicate growth expectations or overvaluation.

17. What is technical analysis and how does it differ from fundamental analysis?

    Technical analysis studies past price and volume data, charts and trends to forecast future price movements, assuming prices reflect all information and move in trends; fundamental analysis instead estimates intrinsic value from economic/financial data.

18. What does the Dow Theory state about market trends?

    It holds that the market moves in three trends—primary (long-term), secondary (intermediate corrections) and minor (day-to-day)—and that a primary trend continues until major indices confirm a reversal.

19. In technical analysis, what are 'support' and 'resistance' levels?

    Support is a price level where buying interest tends to halt a decline; resistance is a level where selling pressure tends to halt a rise. A breakout beyond either signals a likely continued move.

20. What is the expected return of a two-security portfolio?

    E(Rp) = w1·R1 + w2·R2, the weighted average of the individual expected returns, where w1 and w2 are the proportions invested (w1 + w2 = 1).

21. What role does the correlation coefficient play in portfolio risk?

    Portfolio risk falls as the correlation between assets decreases; the lower (more negative) the correlation, the greater the diversification benefit. Maximum benefit occurs at a correlation of -1.

22. What is the efficient frontier in portfolio theory?

    The set of optimal portfolios offering the highest expected return for each level of risk (or the lowest risk for each level of return); rational investors choose portfolios lying on it.

23. State the Capital Asset Pricing Model (CAPM) equation.

    E(Ri) = Rf + βi·(Rm - Rf), where Rf is the risk-free rate, βi is the security's beta, and (Rm - Rf) is the market risk premium.

24. What does beta (β) measure in CAPM/portfolio theory?

    Beta measures a security's systematic (market) risk—its sensitivity to market movements. β = 1 moves with the market, β > 1 is more volatile, β < 1 is less volatile than the market.

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Strategic Financial Management flashcards FAQ