CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Which of the following statements about the effectiveness of the various valuation models does empirical evidence support?

I. A strategy of owning stocks that had above-average EVAs outperformed strategies that relied on more traditional methods of valuation.
II. Value added valuation models take risk into account while return on asset measures of performance ignore risk all together.
III. A historical portfolio built using an EVA strategy, generally exhibited a mush higher degree of volatility than what the capital market line would suggest for that given level of return.
IV. There is no relationship between a firm's MVA and its EVA.
A. I, II and IV
B. II and III
C. IV only
Explanation: I is incorrect because a study by Merrill Lynch found that a strategy of owning stocks that had above-average EVAs actually underperformed strategies that relied on more traditional methods of valuation.

IV is incorrect because these two measures are related concepts: in theory MVA can be thought of as a sum of capitalized future EVA.

User Contributed Comments 1

User Comment
brandsat also: both MVA and EVA measures take into account the cost of equity capital.
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