BEC MCQ 6.4

Question 1

Risk seeking

Answer 1

If the investor certainty equivalent is greater than the expected value of an investment alternative the investor is said to be risk seeking

Question 2

Risk indifferent

Answer 2

when an investors certainty equivalent is equal to the expected return on the investment

Question 3

Risk averse

Answer 3

When an investors certainty is less than the expected rate of investment-Most Managers are risk averse

Question 4

Portfolio theory

Answer 4

Concerned with the construction of an investment portfolio that efficiently balances its risk with rate of return. The braod categories of risk are summarized in the following mnemomic  DUNS
Diversifiable
Unsystamatic(non-market/firm specific)
Non-diversifiable
Systamatic(Market)

Question 5

Effective rate of interest

Answer 5

Interest charged/Cash proceeds

If it is in a compensating balance - Annual interest/Net cash available

Question 6

Foreign currency rules

Answer 6

Nt inflows Nt outflow

Depreciation appreciation Loss gain
Appreciation Depreciation Gain Loss

Question 7

Most effective means hedgedog can avoid overhedging

Answer 7

Hedgedog should acquire only the minimum number of hedge contracts needed to offset the effects of known transactions

Question 8

Effectie interest rate of the loan

Answer 8

Actual finance charge=Px RatexTime
Subtract any interest earned on additional required compensating balance
Divide the difference by the loan proceeds the company has use of