HKSI Licensing Examination Paper 8 (Securities) — All Questions

The price-to-earnings (P/E) ratio, used in fundamental analysis, measures:

• a.A company's total outstanding debt divided by its shareholders' equity, showing its overall financial gearing and leverage
• b.The dividend paid per share
• c.A bond's yield to maturity
• d.The share price relative to earnings per share, indicating how much investors pay per unit of earnings✓

The P/E ratio divides the share price by earnings per share, showing how much the market will pay for each unit of a company's earnings. It is a core valuation metric in fundamental analysis, distinct from gearing or dividend measures.

Technical analysis of a share differs from fundamental analysis in that it primarily studies:

• a.Macroeconomic GDP forecasts
• b.The company's audited balance sheet and profit-and-loss statements over recent financial years
• c.Past price and volume patterns to forecast future price movements✓
• d.The quality of the firm's management

Technical analysis examines historical price and trading-volume data, using charts, trends and indicators to anticipate future movements, whereas fundamental analysis assesses intrinsic value from financial statements and the wider economy.

Spreading a portfolio across different, imperfectly correlated securities primarily aims to:

• a.Guarantee a fixed positive return regardless of overall market conditions in any given year
• b.Increase transaction costs
• c.Reduce unsystematic (specific) risk through diversification✓
• d.Eliminate all possible risk

Diversification reduces unsystematic (company- or sector-specific) risk because losses in one holding may be offset by gains in others. It cannot remove systematic (market-wide) risk or guarantee a return.