Chartered Financial Analyst (CFA) Practice Exam Level 2

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Prepare for the CFA Exam Level 2 with flashcards and multiple-choice questions. Each question includes hints and explanations to boost your confidence and enhance your study process. Get ready for success!

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In which context is the trailing PE ratio primarily used?

To analyze future growth
To assess historical performance
As a forecast indicator
To measure risk

The correct answer is: To assess historical performance

The trailing price-to-earnings (PE) ratio is primarily used to assess historical performance because it is calculated using the earnings from the past 12 months. This retrospective view allows investors and analysts to evaluate how the stock has performed in relation to its earnings over a specific period. By comparing the trailing PE ratio with historical averages, investors can gauge whether a stock is overvalued or undervalued based on its past earnings performance. This context is significant as it sheds light on how effectively a company has generated earnings in the past, providing a basis for historical analysis. When analyzing stocks, understanding past earnings performance is crucial for making informed investment decisions.