MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
FM MC 6 – Investment & Portfolio Management – PRE-FINAL EXAM
I. IDENTIFICATION. Write the letter of the terms that best describe the phrase below. (2 points each)
a.) Risk-Return Trade-off f.) Vertical Analysis k.) Efficiency Ratio
b.) Alpha Ratio g.) Ratio Analysis l.) Coverage Ratio
c.) Beta Ratio h.) Liquidity Ratio m.) Market Prospect Ratio
d.) Sharpe Ratio i.) Solvency Ratio n.) Balance Sheet
e.) Horizontal Analysis j.) Profitability Ratio o.) Income Statement
1. A method of financial statement analysis in which each line item is listed as a percentage of a base
figure within the statement.
2. Evaluates how efficiently a company uses its assets and liabilities to generate sales and maximize
profits.
3. Trading principle that links risk with reward.
4. Breaks down the revenue that a company earns against the expenses involved in its business.
5. A method of quantifying a company's liquidity, operational efficiency, and profitability to evaluate its
performance over time and relative to its peers.
6. It helps determine whether the investment risk is worth the reward.
7. Useful to determine excess returns on an investment.
8. Also called financial leverage ratios, it compares a company's debt levels with its assets, equity, and
earnings.
9. A report of a company’s financial worth in terms of book value.
10. Shows the correlation between the stock and the benchmark that determines the overall market.
11. A method of financial statement analysis that involves comparing historical data, such as ratios or line
items, over a number of accounting periods.
12. It measures a company's ability to pay off its short-term debts as they become due.
13. Measures a company's ability to make the interest payments and other obligations associated with its
debts.
14. Investors use these metrics to predict earnings and future performance.
15. Convey how well a company can generate profits from its operations.
II. TRUE or FALSE. Write T for True and F for False (2 points each)
1. Risk-return tradeoff states that the potential return decreases with an increase in risk. rises
2. The appropriate risk-return tradeoff depends on a variety of factors.
3. Time does not necessarily play an essential role in determining a portfolio with the appropriate levels
of risk and reward. It does
4. According to risk-return tradeoff, invested money can render higher profits only if the investor will
accept a higher possibility of losses.
5. A diversified portfolio reduces the risks presented by individual investment positions.
6. Risk-return tradeoff also exists at the portfolio level.
7. If an investor can only invest in a short time frame, the same equities have a higher risk proposition.
8. A portfolio composed of all equities presents both low risk and higher potential returns. high
9. When comparing similar portfolios, the higher the Sharpe ratio, the better.
10. In general, financial statements are centered around generally accepted accounting principles (GAAP).
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11. Public companies have lenient standards for financial statement reporting. Stricter
12. Public companies must follow GAAP, which requires accrual accounting.
13. Private companies have lesser flexibility in their financial statement preparation. Greater
14. Valuation is the analytical process of determining the current worth of an asset or a company.
15. Valuations can be quickly impacted by corporate earnings or economic events.
16. While quantitative in nature, valuation often does not involve some degree of subjective input or
assumptions. Often involves
17. When a security trades on an exchange, buyers and sellers determine the market value of a stock or
bond.
18. The value of a business requires consistent and regular monitoring.
19. Business owners should aim at building a comprehensive estimate of future cash flows for their
companies.
20. Relative valuation model is a lot easier and quicker to calculate than the absolute valuation model.
III. DISCUSSION
1. In an all-equity portfolio, how risk and reward can be increased? (5 points)
Within an all-equity portfolio, risk and reward can be increased by concentrating investments in
specific sectors or by taking on single positions that represent a large percentage of holdings.
2. Do investments with higher risks yield better returns? (5 points)
Not necessarily. The appropriate risk-return tradeoff depends on a variety of factors, including an
investor’s risk tolerance, the investor’s years to retirement, and the potential to replace lost funds.
Time also plays an essential role in determining a portfolio with the appropriate levels of risk and
reward.
3. Calculating Risk-Return, what is the Alpha Ratio in the following: (2 points each)
-1 0 +1
4. Give at least four (4) key principles of business valuation that business owners who want to create
value in their business must know. (1 point each)
The value of a business is defined only at a specific point in time.
Value primarily varies in accordance with the capacity of a business to generate future cash flow.
The market commands what the proper rate of return for acquirers is.
The value of a business may be impacted by underlying net tangible assets.
Value is influenced by transferability of future cash flows.
Value is impacted by liquidity.
5. What is Financial Statement Analysis? (5 points)
Financial statement analysis is the process of analyzing a company’s financial statements for decision-
making purposes.
6. What is the Purpose of Valuation? (5 points)
The purpose of valuation is to determine the worth of an asset or company and compare that to the
current market price. This is done so for a variety of reasons, such as bringing on investors, selling the
company, purchasing the company, selling off assets or portions of the business, the exit of a partner, or
inheritance purposes.
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MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
FM MC 6 – Investment & Portfolio Management – PRE-FINAL EXAM
