The six most common investment banking interview questions and how to answer them

Beecher Tuttle | E-Financial Careers

For recent graduates, investment banking interviews are built on two main structures: personal behavioral questions and technical queries. As we’re told, the latter tend to be rather formulaic. There are only so many technical questions an interviewer can ask. Still, the questions can be answered in many different ways. Like case studies, it’s often more about how you explain your logic.

Below are six questions commonly asked in investment banking interviews, along with potential answers put together by a business school graduate now working on Wall Street. How did they do? Let us know in the comments.

Define Beta for a layman 

Beta tells you how much the price of a given security moves relative to movements in the overall market.

A Beta of 1 means that if the market moves, the stock moves in unison with the market.

A Beta < 1 means that if the market moves a certain amount, the stock will move less than that amount

A Beta >1 means that if the market moves a certain amount, the stock will move more than that amount.

What is CAPM?

CAPM is the Capital Asset Pricing Model, and it is a model designed to find the expected return on an investment and therefore the appropriate discount rate for a company’s cash flows. It is a linear model with one independent variable: beta.

CAPM divides the risk of holding risky assets into systemic and specific risks. To the extent that any asset is affected by general market moves, that asset entails systematic risk. Specific risk is the risk which is unique to an individual asset. It represents the component of an asset’s volatility which is uncorrelated with general market moves. According to CAPM, the marketplace compensates investors for taking systematic risk, but not specific risk.

CAPM considers a simplified world in which there are no taxes or transaction costs. All investors have identical investment horizons. All investors have identical perceptions regarding the expected returns, volatilities and correlations of available risky investments.

Formula: Ri = Rf + Beta * (MRP)

Rf = risk‐free rate (use 10‐year Treasury)

MRP = Market Risk Premium (Rm – Rf)

Rm = Expected Return of Market

Of the three main valuation methods (DCF, public comparables and transaction comparables), rank them in terms of which gives you the highest price? Which one yields the highest valuation?

Simple answer: It depends. Depends on discount rate in DCF model, depends on the comparable companies used, depends on whether the market is hot/cold and the companies are overvalued/undervalued for no good reason.

Generally, however, transaction comps would give the highest valuation, since a transaction value would include a premium for shareholders over the actual value.

The second highest valuation would probably be the DCF, since there are a lot more assumptions that are involved (growth rate, discount rate, terminal value, tax rates, etc.), but it can also be the most accurate depending on how good the assumptions are.

Trading comps offer the least wiggle room and will solely depend on the choice of companies and how the market treats them.

If you had to pick one statement to look at (balance sheet, cash flow, income statement), which one would it be and why?

No right answer. Can go with whichever one you like. Each has its advantages. Income statement shows the profitability of a company, trends in sales/expenses margins, etc.; balance sheet is a great way to see what items make up the company’s assets and whom the company needs to pay back for those assets. Personally, I would go with cash flow statement. At the end of the day, cash is king. A company that has positive income but very little cash is in deep trouble.

Cash flows are used for DCF models, not net income. The cash flow statement allows observing important performance metrics from both income statements and balance sheets such as net income, depreciation, sources and uses of funds, changes in assets and liabilities.

What is the difference between commercial and investment banking? 

There are many definitions, but these are some of the broader ideas that differentiate the two:

Commercial bank: accepts deposits from customers and makes consumer and commercial loans using these deposits. The vast majority of loans made by commercial banks are held as assets on the bank’s balance sheet.

Investment bank: acts as an intermediary between companies and investors.  Does not accept deposits, but rather sells investments, advises on M&A, etc…loans and debt/equity issues originated by the bank are not typically held by the bank, but rather sold to third parties on the buy side through their sales and trading arms.

What is accretion and dilution? — Give an example 

Accretion is asset growth through addition or expansion. Accretion can occur through a company’s internal development or by way of mergers and acquisitions.

Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Adding to the number of shares outstanding reduces the value of holdings of existing shareholders.

An acquisition is accretive when the combined (pro forma) EPS is greater than the acquirer’s standalone EPS. For  example, suppose analysts expect Procter & Gamble’s EPS to be $3.05 next year. You are a banker charged with the task of modeling the impact to Procter & Gamble’s EPS if they were to acquire Colgate-Palmolive (this is purely hypothetical by the way). So you build your model and determine that the pro form EPS next year would actually be $3.10 — $0.05 higher than had the acquisition not taken place. In other words, the deal would be $0.05 accretive next year. An acquisition is dilutive if the opposite is determined: that pro forma EPS would be lower than $3.05. A deal is considered breakeven when there is virtually no impact on EPS.

Accretion: When pro forma EPS > Acquirer’s EPS

Dilution: When pro forma EPS < Acquirer’s EPS

Breakeven: No impact on Acquirer’s EPS


Robin Judson & Kate Stoughton Berllineer |

As recruiters, we are already seeing candidates who have been laid off and are searching for their next role. The fact that these individuals were laid off does not detract from their work experience or the value that they bring. As you prepare for what’s next, make sure to focus on what you can contribute

... Read Article


Robin Judson & Kate Stoughton Berliner | Robin Judson Partners

If the possibility of getting laid off is keeping you up at night, here are some ways to get ready and ease your mind. Be prepared Dust off your resume. Even if layoffs are not an issue, we recommend keeping your resume up to date! Consider: Pro Tip: Treat your resume like a living document.

... Read Article

How PE Firms are Dealing with a Hybrid Work Environment

Keith Button | Merger & Acquisitions

Hybrid home-office work arrangements, the demands of a younger generation of up-and-coming executives and pressure to develop more diversity in leadership are all impacting the recruiting efforts of middle-market private equity firms. Read the full article by Keith Button

... Read Article

Now Is Not The Time To Accept A Counter Offer

Robin Judson |

Jack G. complained constantly that his fund did not pay him anywhere close to the value he produced. In his role as a Principal in XYZ Private Equity Fund, he had significant P&L attached to the portfolio companies he worked with, sat on two boards and a deal he originated was about to close. Two

... Read Article

Some Wall Street dealmakers are choosing WFH over big paydays, as return-to-office plans become key to recruiting

Samantha Stokes | Insider

Recruiters told Insider that some senior bankers at the managing-director level and above are saying they won’t consider new roles that are based in the office full-time. Samantha Lee/Business Insider Flexible-work policies are top of mind for many senior bankers, recruiters say. Candidates are turning down roles that don’t allow remote work at least sometimes. Some

... Read Article

Wall Street’s Hottest Commodity: College Grads With Excel Skills

Mary Biekert | Wall Street Journal

All across Wall Street, one price keeps going up: the one for young talent. Big banks can’t hire junior staff fast enough — not even at the new going rate of $100,000 a year. Chalk it up to the pandemic. Or the notoriously long hours. Or youthful realizations that maybe banking isn’t all it’s cracked

... Read Article

How To Handle Job Offers In The Post-Lockdown Economy

Robin Judson |

Many job searches during this post-lockdown period result in candidates receiving multiple offers. How to best handle the scenario.

... Read Article

A Guide To Interviewing From A Career Recruiter

Robin Judson | Robin Judson Partners

We believe we know interviewing because we have been in the financial recruiting business for over 25 years. This is our guide.

... Read Article