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NISM Certifications · NISM-Series-XV: Research Analyst · Introduction to Research Analyst Profession

An analyst values a stock using a P/E approach. The analyst's firm policy says that a recommendation must have a reasonable basis. Which of the following would most clearly violate this requirement?

Issuing a Buy rating with a P/E-based target price without documenting the earnings forecast or peer comparison violates the reasonable-basis requirement. A recommendation must be supported by records of data and assumptions. Updating for results, using audited data and disclosing risks are all proper practices.

  1. AIssuing a 'Buy' rating with a target price based on a P/E multiple, without documenting the earnings forecast or peer comparison usedCorrect
  2. BUsing FY25 audited earnings together with a documented peer P/E range
  3. CUpdating the target price after the company announces quarterly results
  4. DStating the key assumptions and risks in the report

Explanation

A recommendation needs a documented, reasonable basis such as forecasts and comparables. Issuing a rating and target without supporting records fails this. The other options show documentation, updating on new information and disclosure of assumptions, which are good practice.

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