BUS FPX 2062 Assessment 2

Student Name

Capella University

BUS-FPX2062 Finance Fundamentals

Prof. Name:

Date

Assessment Overview

By successfully completing this assessment, you will demonstrate proficiency in the following course competencies and related scoring guide criteria.

Competency 1: Explain Financial Environments and Concepts

Explain why forecasting and budgeting are essential practices for businesses, governmental agencies, and individuals.

Forecasting and budgeting are essential because they enable effective financial planning and control. For businesses, they help anticipate future revenues and expenses, ensuring sufficient resources for operations and growth. Governmental agencies use these tools to allocate public funds efficiently and to achieve policy goals without overspending. Individuals benefit from budgeting and forecasting by managing their personal finances, setting savings goals, and avoiding debt. Overall, these practices lead to greater stability, efficiency, and financial success.

Explain the relationship between microeconomics and macroeconomics.

Microeconomics and macroeconomics are interconnected fields that analyze different levels of economic activity. Microeconomics focuses on the behaviors and decisions of individual households, firms, and industries, while macroeconomics examines the economy as a whole, including national income, inflation, and unemployment.

Aspect	Microeconomics	Macroeconomics
Focus	Individual consumers and businesses	National or global economy
Key Concepts	Supply and demand, pricing, production, and competition	Economic growth, fiscal and monetary policy, inflation, and unemployment
Relationship	Micro decisions (e.g., consumer spending and business investment) influence macroeconomic indicators such as GDP.	Macroeconomic factors (e.g., interest rates and inflation) affect micro-level decisions about saving, investment, and consumption.

Thus, while microeconomics examines specific market mechanisms, macroeconomics studies the overall outcomes and policies that shape those mechanisms.

Explain how the standard deviation of returns in a portfolio changes as the number of stocks within the portfolio increases.

As the number of stocks in a portfolio increases, the standard deviation of returns generally decreases. This occurs due to diversification, which reduces the overall portfolio risk by spreading investment exposure across different securities. While individual stock movements may still fluctuate, their combined effect on the portfolio becomes less volatile because losses in some investments may be offset by gains in others.

Number of Stocks	Effect on Standard Deviation	Explanation
Few (e.g., 1–5)	High	Portfolio performance is heavily influenced by each stock’s movement.
Moderate (e.g., 10–20)	Medium	Risk begins to decrease as diversification increases.
Many (e.g., 30+)	Low	Portfolio risk is minimized as unsystematic risk is diversified away.

Explain which group of stocks makes up the more diversified portfolio.

A portfolio is considered more diversified when it includes a variety of investments across multiple asset categories and regions. A well-diversified portfolio may contain stocks from different industries (technology, healthcare, finance, manufacturing), company sizes (large-cap, mid-cap, small-cap), and geographical locations (domestic and international). Additionally, it may incorporate other asset classes such as bonds, real estate, commodities, cash, or alternative investments. This diversification helps reduce exposure to market-specific or sector-specific risks, enhancing portfolio stability and long-term returns.

Competency 2: Apply Financial Computations and Processes

This competency focuses on performing key financial calculations accurately.

Financial Task	Description
Calculate the amount of a monthly mortgage payment.	Use the loan amount, interest rate, and loan term to determine equal monthly payments using the amortization formula.
Calculate the approximate price at which a preferred stock will most likely sell.	Apply the dividend and required rate of return to estimate the stock’s price.
Calculate a bond’s value given a specific yield to maturity.	Determine the present value of the bond’s future coupon payments and face value, discounted at the yield to maturity rate.
Calculate the yield or return on a preferred stock.	Divide the annual dividend by the current market price of the preferred stock.
Calculate the total dollar return on an investment, including both capital gains and dividend income.	Add the capital gain (or loss) to dividend income received during the holding period.
Calculate the Net Present Value (NPV) of an investment and decide whether to proceed with the project.	Compare the present value of future cash flows with the initial investment cost. A positive NPV indicates a profitable project.

References

Brigham, E. F., & Ehrhardt, M. C. (2022). Financial Management: Theory & Practice (17th ed.). Cengage Learning.

Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.