Certified Valuation Analyst (CVA) Practice Exam

Which financial analysis technique emphasizes comparing returns on assets with associated risk levels?

1. Ratio analysis

2. Risk-adjusted return analysis

3. Valuation analysis

4. Market comparison analysis

The correct answer is: Risk-adjusted return analysis

The correct choice emphasizes the concept of assessing the relationship between returns generated from assets and the level of risk involved in achieving those returns. This technique is integral to investment analysis and portfolio management, where understanding both the return and risk factors is crucial for making informed financial decisions. Risk-adjusted return analysis specifically quantifies how much risk is undertaken to achieve a return. It allows analysts to evaluate the performance of an investment relative to its risk. For example, it might use measures such as the Sharpe ratio, which computes returns per unit of risk, providing a more nuanced view of how effectively an investment is generating returns given the risks involved. Other techniques, while useful for broader financial assessments, do not directly focus on the interplay of returns and associated risks. Ratio analysis generally deals with the analysis of financial statements through various ratios but does not specifically address risk versus return. Valuation analysis centers on determining the intrinsic value of an asset based on future cash flows and does not inherently factor in risk levels. Market comparison analysis involves comparing a company's performance to industry peers but doesn't delve deeply into the risk-adjusted returns framework.