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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients

In personal financial statement analysis, which ratio is computed by dividing a client's liquid assets by monthly non-discretionary cash outflows?

The liquidity ratio divides liquid assets by monthly non-discretionary cash outflows. It shows how many months of essential expenses the client can meet from liquid resources. Other ratios such as savings, debt service and solvency use different numerators and denominators.

  1. ALiquidity ratio (emergency fund coverage in months)Correct
  2. BSavings ratio
  3. CDebt service ratio
  4. DSolvency ratio

Explanation

The liquidity ratio divides liquid assets by monthly non-discretionary expenses, which shows how many months the client can meet essential outgo without other income. The savings ratio uses savings divided by gross income, the debt service ratio uses EMIs divided by income, and the solvency ratio uses net worth divided by total assets.

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