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SIE > 6. Types Of Risk > Flashcards

6. Types Of Risk Flashcards

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SIE Exam flashcards
1
Q

_______ risk, is the risk that changes in the overall economy will have an adverse effect on individual securities, regardless of the company circumstances

  • generally caused by factors that affect all businesses, such as war, global security threats, or inflation.
A

Systematic risk

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2
Q

True or false?

No matter how diversified a portfolio of investments is, it will still be subject to systematic risk

One cannot diversify away systematic risk.

A

True

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3
Q

_______ risk, is the risk that when the overall market declines, so too will any portfolio made of securities the market comprises.

A

Market risk

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4
Q

_______ risk, is defined as a potential change in bond prices caused by a change in market interest rates after an issuer offers its bonds.

  • if interest rates rise post-issuance, existing bonds (with a lower coupon) will be viewed as less attractive and would be priced in the market at a discount.

Conversely

If rates fall, the existing bonds (with their higher coupons) will be viewed as desirable and will trade in the market at a premium.

A

Interest rate risk

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5
Q

Defined as the all likelihood that bonds with longer maturities will fluctuate more than bonds with short immaturities, because this interest rate differential is potentially longer lived.

A

Duration?

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6
Q

_______ risk refers to the possibility that an investor will be unable to reinvest cash flows received from an investment, such as coupon payments (stated/nominal yield) or interest, at a rate comparable to their current rate of return.

-considered a variation of interest rate risk.

  • assumes obtaining the same level of income will incur additional credit or market risks

-

A

Reinvestment risk

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7
Q

Sometimes called purchasing power risk, ______ risk the effect of continually rising prices on investment returns

A

Inflation risk

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8
Q

Is a prolonged period of falling prices.

  • would make fixed- income payments more valuable because bond investors could buy more goods and services with their coupon payments.
A

Deflation.

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9
Q

When the interest rate paid on a debt security is less than the current inflation rate, the investor suffers from which of the following risks?

A. Liquidity risk
B. Call risk
C. Purchasing power risk
D. Currency risk

A

C. Purchasing power risk

Is a systematic risk that impacts fixed-income investments. It is the risk that it fixed payment from an investment will lose purchasing power due to inflation.

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10
Q

Your customer has carefully researched the purchase of stock in green shoe company. After the purchase, the equity markets dropped 20%, and green shoe stock dropped along with it.

Green shoe gave up 15% during this drop. This is an example of.

A. Business risk
B. Interest rate risk
C. Market risk
D. Non-systematic risk

A

C.

All stocks in the market are affected. When the market moves. The sensitivity of a given security to its market is measured by beta.

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11
Q

This type of risk can be reduced through diversification.

They are risks that are unique to a specific industry, business, enterprise, or investment type.

A

Non-systematic risk or unsystematic risk.

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12
Q

Measures the volatility of an asset

A

Beta

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13
Q

The market has a beta of 1.00

True or false?

A

True

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14
Q

If a security has a beta that is greater than 1.00, it is more volatile than the market.

If an asset has a beta of less than 1.00, it is more stable than the market as a whole

True or false?

A

True

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15
Q

The following are all examples of ______ risk

  • default risk
  • business risk
  • financial risk
  • call risk
  • prepayment risk
  • currency risk
  • liquidity risk
  • regulatory risk
  • legislative risk
  • political risk
  • sovereign risk
A

Non-systematic risks

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16
Q

_______ risk is the potential for an investor to lose some or all of their money – their invested capital – under circumstances related to an issuer’s financial strength.

  • includes the risk that a debt security fails to make interest payments
A

Default risk (financial risk)

17
Q

______ risk, is an operating risk generally caused by poor management decisions.

At best

  • earnings are lowered

At worst

  • the company goes out of business and common stockholders could lose their entire investment
A

Business risk

18
Q

________ risk

  • relates primarily to those companies that use debt financing (leverage).

Sometimes called credit risk or default risk

A

Financial risk

19
Q

______ risk, the risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at a comparable rate of return.

A

Call risk

20
Q

True or false?

Most corporate municipal issuers generally provide some years of call protection

A

True

21
Q

_______ is the risk involved with the premature return of principal on a fixed-income security.

  • GNMAs are often subject to this type of risk because the underlying mortgages may be refinanced when interest rates fall.
A

Prepayment risk

22
Q

Is the possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the US dollar.

A

Currency risk

23
Q

True or false?

Currency is quoted at the spot rate, meaning a given currencies current market value.

A

True

Currency is always quoted in relative terms between two currencies

For example, the euro could be getting stronger or weaker versus the US dollar

24
Q

The risk that investor might not be able to sell an investment quickly at a fair market price.

  • aka marketability risk
A

Liquidity risk

The marketability of the securities a registered representative (RR) recommends must be consistent with the clients liquidity needs.

25
Q

True or false

Fixed assets such as real estate, fine art, or collectibles are generally liquid

A

False

These assets may be difficult to buy or sell, and transaction costs might be significantly higher.

26
Q

Changes in the rules that a business must comply with can devastate individual companies and industries almost overnight.

What type of risk is this?

A

Regulatory risk

27
Q

_______ risk results from a change in the law.

  • a government agency, state or federal, may pass certain regulations, but only a legislature can pass a law.
  • changes to the tax code are the most obvious _______ risks.
A

Legislative risks

28
Q

Capture the risk of a country defaulting on its commercial debt obligations.

When a country is at risk of defaulting on its debt, the impact is felt on financial markets worldwide.

A

Sovereign risk

29
Q

Is risk that is built into the system.

A

Systematic risk

30
Q

Portfolio managers will use derivative securities to _______ the portfolio (systematic) risk.

A

Hedge

31
Q

Mark invests in a portfolio of large cap stocks.

Mark asked his investment advisor how he might hedge against risk he may be caring.

How would Mark’s investment advisor do this?

A

Buys into the portfolio puts on the S& P 500 Index

Remember buyers of put contracts are bearish investors.

32
Q

The most common way to hedge risks that a specific security may carry is to build a portfolio that consists of securities of several different issuers.

The term for this is ___________.

A

Diversification

33
Q

One of the advantages of a security being traded on a listed stock exchange is the ready availability of buyers and sellers. This has the tendency to reduce or even eliminate

A. Inflation risk
B. Liquidity risk
C. Market risk
D. Price risk

A

B.

Liquidity risk is the uncertainty that an investor will be able to find a buyer for a security when the need to sell rises.

Listed securities virtually always have ready marketability

34
Q

Before making investment, it is wise to evaluate the potential risk involved. It is safe to assume that.

I. The greater the risk, the greater the potential award.
II. The greater the risk, the lower the potential award
III. The lower the risk, the greater the potential loss
IV. The lower the risk, the lower the potential reward

A

I and IV.

One of the primary axioms of investing is the relationship between risk and reward.

When an investor takes more risk, it is in the expectation of a greater reward.

Reducing the risk should result in a lower reward.

SIE (10 decks)

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