FINAL EXAMINATION

FINANCIAL MANAGEMENT 3

1. Discuss the overall purpose people have for investment? (5-10 sentences only)

The overall purpose is to make your money grow by putting them into a company
that have the potential to earn strong rates of return. People choose to invest because
they know that there is an opportunity to increase their financial worth. People also
have to save money for their retirement. As they are working, they put it in portfolio of
investments, such as stocks, bonds, mutual funds and businesses so that at
retirement age, they can live off funds earned from these investments. People also
choose to invest if they have an excess money in order to make a profit or income. It
is also being done with people to earn money without exerting much effort. Investment
is like an item being purchased by the investor and expecting future income. It's an
asset where the money grows.

2. Divide a person’s life from ages 20-70 in 10-year segment and borrowing
patterns during each period. (Table Format)

Ages Borrowing Patterns

20-30 Years old The investor decides to plan his investment. They understand the
market and depending on the risk bearing characteristics decide on
financial instruments in which they would invest their money. They
study the characteristics of the various financial instruments
available in the market and decide the instrument in which they think
that the investment would be beneficial to them.
30-40 Years old The investor has additional responsibilities as he got married and
has a responsibility of children. The investor may think of taking loan
for purchasing his own land, building his own house, for purchasing
appliances, purchasing vehicles and etc. The investor will also think
about the investments that he would want to make so that he can be
benefited from it in the future. It is important not only to make
investments in this time period but also important to make such
investments that will be useful to them in the long run. The investor
has to make such investments which will pay him good returns in the
future. They can think of investing their money in fixed deposits
which is a safe investment and involves no risk. If they have the risk
bearing capacity, then they can take the risk of investing in stocks
that can perform well in the market and will earn good returns in the
future. They can also plan and invest some part of their investments
 in bonds, mutual funds and medical insurances. These investments
will be useful in them in future.
40-50 Years old The investor will have the responsibility of paying the educational
expenses of their children. The educational expenses will be met
either from the savings that was previously done or by the amount
that he will receive from the investments that he made. The
expenses are more in this time period so the amount earned from
the investments will be more valuable to him.
50-60 Years old Mainly the time period when the medical expenses increase. This is
the time period when the investor and his spouse will be in need of
medical treatment for any diseases that may occur to them at this
age. So, the expenditure will be met by them from the savings and
they can also meet the expenses from the medical insurance that
they may have taken in the past just like Philhealth.
60-70 Years old Mainly the age when the investor and his spouse will have more
medical expenses. There is no source of income in this stage and
the only source of income is the money received from the various
investments made by them.

3. What is the difference between stocks and bonds? (Table Format)

Stocks
 Represent an ownership interest in a
corporation
 Stocks pay dividends to the owners, but  Bonds pay interest to the
only if the corporation declares a
dividend
 There is no return guarantee
 Voting rights in the company
 Are issued by companies at a stock
exchange
 Higher-risk option
 Typically traded through a central
exchange
 Stocks are sold internationally on
different exchanges
vs Bonds
 A debt instrument with a promise to
pay back the money with interest
bondholders
 There is a return guarantee
 Preferential treatment when bond
matures
 Can be made as corporate,
municipal or treasury bonds.
 Lower-risk option
 Typically traded over the counter
(OTC)
 Bonds are typically sold at the
counter (OTC)

4. How will you measure the risk of your investment? (5-10 sentences only)
 The standard way to calculate the risk of a particular investment is to calculate the
Standard deviation of its past prices. This method measures an investment's pure
volatility. Standard deviation is a measure of the variation around an average or mean.
Beta measures an individual investment's volatility in relation to the stock market. This
measurement is also useful because it suggests how far you can anticipate your
investment might fall when the market falls, and, conversely, how much your
investment may rise when the market rises. Alpha measures an investment's beta
against its actual performance. The Treynor index measures the excess return per
unit of risk taken. The higher the Treynor index, the more return the investment is
making per unit of risk it is taking. Style analysis is a statistical method that identifies
how a mutual fund performs compared to individual global asset classes. R-squared
is a measure of a mutual fund's diversification relative to the market.