The final exam will have 5 questions in the same format as the question below.
a) Select the 3 most common sources of data to calculate financial ratios related to a specific business. [6 marks]
Business report
Accounts payable
Cash flow statement
Competitive analysis
Monthly sales report
Balance sheet
Market analysis report
Income statement
Bank statements
Annual report
b) For each value provided below, identify the most likely source for that value (it should be one of the choices selected in part (a) of the question). Then, use the values provided to calculate the current ratio and working capital to sales ratio. [14 marks]
Current assets of £518.9 million
Current liabilities of £719.8 million
Sales of £2,000.7 million
Cash generated from operations £248.2 million
The final exam questions will depend on the following concepts and calculations. Please also study the review notes.
Does standard deviation of an equity stock price reflect market risk?
Yes, standard deviation represents diversifiable and non-diversifiable risks. Market risk is another name for non-diversifiable risk.
What is the relationship between variance and standard deviation?
Standard deviation is the square root of variance.
Stock A is a higher financial risk than stock B. Which stock will have a higher expected return? Which stock will have a higher standard deviation?
Expected return is not an indicator of financial risk, so the expected return of stock A and B are independent and can be any value. Standard deviation is a significant indicator of financial risk and stock A will have a higher standard deviation because it has more financial risk.
For a given equity stock price, how is the monthly mean, variance and standard deviation calculated?
See formulas in the review notes. Practice with examples using your calculator.
What is the difference between the historical method and the parametric method of calculating value at risk?
The historical method sorts the data in a cumulative frequency range from lowest to highest in order to estimate the 1%, 2% and 5% confidence levels. The parametric method assumes that the data conforms to the normal distribution and calculates the standard deviation to estimate the 1%, 2% and 5% confidence levels.
For a given equity stock, how is the value at risk calculated for a specific asset value and confidence level?
Practice with spreadsheet example from class.
Mean-variance theory of portfolio analysis depends on which statistical calculations?
The name mean-variance reflects its dependencies on weighted average, covariance and correlation coefficient calculations. Practice calculations with sample portfolios.
What does the efficient frontier represent about a portfolio of stocks?
The efficient frontier represents the range of all possible ways to arrange the portfolio composition (weightings of each individual stock in the portfolio) and the associated expected return and standard deviation for each composition.
According to the mean-variance theory of portfolio analysis, the addition of more stocks into a portfolio decreases which property of the portfolio?
The addition of stocks into a portfolio decreases its diversifiable risk, which has the effect of reducing the standard deviation of the portfolio value.
According to the single factor Capital Asset Pricing Model, the beta value for an equity stock is an indication of which type of risk?
Beta value is an indication of the volatility or risk of an equity stock relative to the market of all stocks.
According to the single factor Capital Asset Pricing Model, what does the index or benchmark represent?
The index or benchmark represents the performance of the whole market. This is usually done by using a representative index of stocks such as the Dow Jones Industrial Average (DJIA), Nasdaq Composite Index (NASDAQ), S&P 500 and the FTSE 100.
How is the beta value calculated for a given equity stock and index?
Practice regression (manually or with a calculator) to calculate the slope and intercept values. The slope value is the beta value.
Stock A is a higher financial risk than stock B. Which stock will have a higher beta value?
Beta value is an indicator of financial risk relative to the market. Stock A will have a higher beta value which will also likely be higher than 1. Stock B will have a lower beta value which preferably would be lower than 1.
Financial risk is more dependent on the actual value of stock prices or the amount of change in the stock prices?
Financial risk is more dependent on volatility, such as standard deviation, which is the same as the amount of change in the stock prices.
