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Explain one financial concept to me.
As you work with your clients, you will need to be able to take complicated financial concepts and explain them in terms that are easily understood. Review industry concepts that you may not use every day so that you can confidently discuss any term the interviewer throws your way. Here are some concepts you will want to familiarize yourself with: - Risk/Return Tradeoff - Asset Allocation - Random Walk Theory - Optimal portfolio - Net worth - Liquidity - Inflation - Risk Tolerance - Bull Market These are all concepts you will want to familiarize yourself with. Maybe crack open that textbook you used to study for your CFA exam and quiz yourself. As you review these concepts, take some time to write out their definitions in simple terms you would use to explain it to your client.
Answer examples
"The most common financial concept that I find myself explaining to my clients is the Random Walk Theory. Many new investors believe that the Stock Market is somehow rigged so I like to teach them that stock prices are random, and unpredictable. The Random Walk Theory is also called the Random Walk Hypothesis."

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User-Submitted Answers

Explain one financial concept to me.
I would like to talk about asset allocation. Its an investment technique which balances risk and diversifies assets by dividing among major categories like bonds, stocks, real estate.
I would like to talk about asset allocation. Its an investment technique which balances risk and diversifies assets by dividing among major categories like bonds, stocks, real estate.
Asset allocation means diversifying your money among different types of investment categories, such as stocks, bonds and cash. The goal is to help reduce risk and enhance returns.
Business entity concept: in this concept business is trested as separeatd to owners. It both are different owners and busiess examples are with drawn from persnal use.
1. Time value of money 2. Accrual vs cash basis3. Cost of capital. Equity vs debtCopse one and explain.
Cash flow- Cash flow is the single best determining factor that one can use to figure out how a company operates and if it works.
Risk versus Return Payoff, its where higher risk products yield higher rates of return. Higher risk investments could be in startup companies, or emerging markets. Taking lower risk typically yields lower rates of return. Market driven products usually have higher rate of return, whereas bonds, or other relatively guaranteed products have lower yields.
Company Equity values are not growing, market fluctuations affect the company profitability.
Financial concepts ranges from diversification that is not placing all your strategies in one income stream, then you have the risk/return. That is based on the risk being taken what return would be acceptable. The greater the risk the higher the return is required.
Internal controls are crucial in every business to have checks and balances and not allow one person to be in control of cash and finances.
The matching principle is a fundamental accounting rule for preparing an income statement. It simply states, “Match the sale with its associated costs to determine profits in a given period of time—usually a month, quarter, or year.” In other words, one of the accountants’ primary jobs is to figure out and properly record all the costs incurred in generating sales, including the cost to make and deliver the product and the sales and administrative support. Because of the matching principle, the expenses on the statement are not necessarily those things that we purchased that month, or even paid for that month.
Tax payer a person who has to pay tax.
Time Value of Money, it unleashes the potential of looking at the past and the present of financial analysis.
Working Capital - It explains the difference between Current assets and current liabilities and helps determine the capital available to the company for day to day activities, the optimum capital again depends on the nature of business and resources used.
Working capital - gives a glance into the capital available to the company for day to day activities.
Revenue recognition: concept that revenue can only be recognized when all the steps to act on behalf of the company have been met.
Compound interest -It is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on.
Break even point, this would be the analysis to determine the point at which revenue received equals the costs associated with receiving the revenue.
Capital Asset Pricing Model. Developed by William Sharpe. Which states that Cost of equity should risk free return + Beta of Market return minus Risk free return. In that Beta is nothing but an indicator showing deviation of a stock with respect to market. Rf+Beta(Rm-Rf)
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as bonds, stocks, real estate, and cash.
% of completion method: This method is used in construction contracts in which revenue is accrued in line with % of completion method which will be in line with cost spent in actuals.
Money measurement concept.
Diversification - donot put all your eggs in the same basket.
Balance sheet, it shows the company asset and liability. It ability to meet it obligation.
The risk/return tradeoff This is the balance between the desire for the lowest possible risk and the highest possible return.
Many are there, simple logic is make the original investment increased as much as possible.
Inflation is the concept that I often hear from my childhood. inflation means increase in the prices of goods. This arises due to decrease in the value of our currency in terms of foreign currency and also due to the black markets. There are many types of inflations like walking inflation, creeping inflaton, etc.
Dividends: improves total return. I also look at the dividend payout ratio to review the strength of the company to payout its dividend.
The risk/return tradeoff could easily be called the "ability-to-sleep-at-night test." While some people can handle the equivalent of financial skydiving without batting an eye, others are terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you can take while remaining comfortable with your investments is very important.
The risk/return tradeoff - simply means the opposite relationship between the risk of trading (higher level of uncertainty) to the potential return from the investment/trading (profit)
I always believe fundamental analysis for investing in stocks, and also I will prefer for long term investments. Before investing in any stocks we have to do fundamental analysis. Ratio analysis, Industry analysis, performance of that company in that industry analysis, vision and mission for the company.
Gross margin is revenue minus cost of goods sold, and before any related expenses and taxes.
Cash flow- Cash flow is the single best determining factor that one can use to figure out how a company operates and how it works.
NPV- Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.
Net Present Value is a concept where before involving into any investment one makes the future cash flows and capital investment and their results and then we bring them down to their present value using the discounting technique of cash flows and thus understand whether the investment is sound on the commercial front or not.
What is working capital? Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months.
Dual entry concept that implies that every transaction have dual impact on financial statement.
1. Accounting equation There's a basic accounting equation that serves as the foundation for double-entry bookkeeping and accounting: assets = liabilities + shareholders' equity. This equation can also be written in either of these two ways: liabilities = assets - shareholders' equity shareholders' equity = assets - liabilities The three components of this formula are: Assets, including cash, accounts receivable, and inventory Liabilities, including accounts payable and outstanding loans Shareholders' equity, including funds received from investors and earnings that have not yet been distributed to investors.
The London fixed price of gold is a daily process in which major investment banks, on behalf of their clients, will buy and sell gold and push the prices up or down. This happens twice a day, which makes the price of gold driven by supply and demand.