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NEW QUESTION # 62
All else equal, a higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to:
Answer: B
Explanation:
A higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to a lower estimate of intrinsic value.
Higher discount rate: The discount rate is used to calculate the present value of future cash flows. A higher discount rate reduces the present value of those cash flows.
Intrinsic value: The intrinsic value of a company is the sum of the present values of its expected future cash flows. As the discount rate increases, the present values decrease, resulting in a lower estimate of intrinsic value.
Reference:
CFA ESG Investing Principles
Standard finance and valuation textbooks explaining DCF analysis
NEW QUESTION # 63
Which of the following is a challenge of integrating ESG analysis into investment processes?
Answer: C
Explanation:
One of the main challenges in integrating ESG analysis into investment processes is the cultural challenges and biases within investment firms. Some firms may resist adopting ESG practices due to entrenched views or conflicting priorities. (ESGTextBook[PallasCatFin], Chapter 7, Page 319)
NEW QUESTION # 64
Bonds that fund projects that provide access to essential services, infrastructure, and social programs to underserved people and communities are best described as:
Answer: A
Explanation:
Social bonds are designed to finance projects that provide social benefits, such as affordable housing or access to healthcare, particularly in underserved communities. (ESGTextBook[PallasCatFin], Chapter 8, Page 422)
NEW QUESTION # 65
The European Union (EU) Ecolabel:
Answer: C
Explanation:
The European Union (EU) Ecolabel is the official EU voluntary label for environmental excellence.
* EU Ecolabel Overview: The EU Ecolabel is a recognized certification that indicates a product or service has a reduced environmental impact throughout its lifecycle.
* Voluntary Participation: Businesses can voluntarily apply for this label, demonstrating their commitment to environmental excellence and compliance with rigorous environmental criteria set by the EU.
* Consumer Trust: The label helps consumers identify products and services that are environmentally friendly and meet high environmental standards, promoting sustainable consumption.
CFA ESG Investing References:
The CFA Institute's discussions on environmental labels and certifications highlight the role of the EU Ecolabel as a voluntary but stringent standard for environmental excellence, helping consumers and investors make informed, sustainable choices.
NEW QUESTION # 66
Avoiding long-term transition risk can most likely be achieved by:
Answer: B
Explanation:
Avoiding long-term transition risk involves aligning investment strategies with the anticipated changes in regulations, market dynamics, and environmental sustainability goals. Transition risk refers to the financial risks associated with the transition to a low-carbon economy, which can impact the value of investments, particularly those in carbon-intensive industries.
Understanding Transition Risk: Transition risks are associated with the shift towards a low-carbon economy. These include changes in policy, technology, and market conditions that can affect the valuation of carbon-intensive assets.
Divesting Carbon-Intensive Investments: Divesting from highly carbon-intensive investments, particularly in the energy sector, is a key strategy to mitigate long-term transition risks. Carbon-intensive investments are likely to be adversely affected by stricter environmental regulations, carbon pricing, and shifts in consumer preferences towards more sustainable energy sources.
Examples and Case Studies: The urgency to respond to the climate crisis is driving both national and corporate commitments towards Paris-aligned net-zero carbon emissions targets. Reducing portfolio concentration in highly carbon-intensive sectors will decrease exposure to long-term transition risks. However, this may reduce the portfolio's income yield as the energy sector often provides above-market cash flow profiles and dividend income streams.
Strategic Asset Allocation: Effective asset allocation strategies involve reallocating investments to sectors with lower carbon footprints and higher resilience to transition risks. This approach ensures the sustainability of investment returns and aligns with long-term climate goals.
Therefore, the correct approach to avoiding long-term transition risk is divesting highly carbon-intensive investments in the energy sector.
NEW QUESTION # 67
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