CFA Practice Question

There are 57 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to how security valuation models may be used?

I . Models that are used to value publicly traded securities cannot also be used to value private companies.
II. With the current security price known, valuation models may be used to calculate some of the expectations that the market has for that particular security.
III. The dramatic ascent and subsequent decline in the stock prices of internet stocks proves that the valuation models do not work.
IV. Forming expectations about a security's future cash flows is a more difficult task than deciding which valuation models to employ.
A. I, IV only
B. II and IV
C. I, III, IV only
Explanation: I is incorrect because models that are used to value publicly traded securities may also be used to value private companies. The only thing that will be different is the estimates used when inputting the variables into the model.

III is incorrect because the dramatic ascent and subsequent decline in the stock prices of internet stocks only proves that the expectations inputted into the valuation models were irrational. The models themselves are mathematically sound.

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