1.D Types of Risks Flashcards
Which type of risk is also known as market risk and cannot be eliminated through diversification?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Systematic risk
Explanation: Systematic risk, also known as market risk, refers to the risk that affects the entire market or a broad segment of it. It cannot be eliminated through diversification because it is inherent to the overall market conditions.
1.D Types of Risks
If a company experiences a lawsuit due to a product defect that affects only its own stock, what type of risk is this?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Unsystematic risk
Explanation: Unsystematic risk is specific to a particular company or industry and can be reduced through diversification. A lawsuit affecting only one company’s stock is an example of unsystematic risk.
1.D Types of Risks
When an investor forgoes the potential gain from one investment to choose another, it is known as:
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Opportunity cost
Explanation: Opportunity cost refers to the cost of forgoing the next best alternative when making an investment or financial decision.
1.D Types of Risks
Which aspect of a company’s financial structure determines the order in which investors get paid in the event of liquidation?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Capital structure
Explanation: Capital structure includes the mix of equity and debt financing a company uses, and it determines the order in which investors are paid in the event of liquidation, known as liquidation priority.
1.D Types of Risks
In a scenario where a recession leads to a decline in the stock market, what type of risk is most likely affecting the investor’s portfolio?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Systematic risk
Explanation: A recession affecting the overall stock market is an example of systematic risk, which is market-related and cannot be eliminated through diversification.
1.D Types of Risks
If a company chooses to issue bonds to raise capital instead of selling additional shares of stock, what concept is most relevant to this decision?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Capital structure
Explanation: The decision of whether to issue bonds or sell additional shares of stock is related to the company’s capital structure.
1.D Types of Risks
A diversified portfolio of stocks is most effective in reducing which type of risk?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Unsystematic risk
Explanation: Diversification is most effective in reducing unsystematic risk, as it spreads risk across different assets or industries.
1.D Types of Risks
In a scenario where an investor chooses to invest in a government bond with a fixed interest rate rather than a variable-rate corporate bond, what concept is most relevant to this decision?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Opportunity cost
Explanation: The investor is considering the opportunity cost of not potentially earning more from a variable-rate corporate bond.
1.D Types of Risks
Which type of risk can be minimized through diversification by holding a well-rounded portfolio?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Capital structure
Unsystematic risk
Explanation: Diversification can minimize unsystematic risk by spreading investments across various assets or industries.
1.D Types of Risks
If a company has a high proportion of debt in its capital structure, what risk does it primarily face?
A) Systematic risk
B) Unsystematic risk
C) Opportunity cost
D) Financial risk
Financial risk
Explanation: A company with a high proportion of debt in its capital structure primarily faces financial risk, as increased debt can lead to higher interest expenses and potential financial distress.
1.D Types of Risks
