Certified Valuation Analyst (CVA) Practice Exam

In a valuation context, what defines the yield when attracting investment capital?

1. The historical average yield in the market

2. The return expected relative to the company's risk

3. The industry average for similar businesses

4. The projected earnings for the next fiscal year

The correct answer is: The return expected relative to the company's risk

The yield in a valuation context is fundamentally defined by the return expected relative to the company's risk. This concept is rooted in the principles of finance and investment, where the risk associated with a given investment must be compensated with an appropriate return. Investors typically evaluate potential returns not just based on absolute figures but also in relation to the risk profile of the investment. A higher risk investment would generally demand a higher expected yield to make it appealing to investors. By focusing on the risk-return relationship, it encapsulates the notion that potential yields should align with the uncertainty an investor faces regarding the performance of the company or asset. Other options may present related concepts but do not accurately encapsulate the specific definition of yield in this context. The historical average yield in the market represents past performance, which does not necessarily predict future returns or account for the specific risk level of the company being valued. Similarly, the industry average for similar businesses provides a benchmark, yet it still does not take into account the unique risk factors related to the subject company. Projected earnings for the next fiscal year could indicate potential performance but again do not factor in the risk-adjusted return that investors require when making a capital investment decision.