ch 14 Flashcards
1
Q
systematic risk
A
- the risk in the returns return os an investment that is associated with the macroeconomic factors that affect all risky assets
- nondiversifable risk
- risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company’s circumstances
- market risk, interest rate risk, inflation risk
2
Q
market risk
A
- type of systematic risk
- when the market goes down, so do securities
- measured by security’s beta
3
Q
interest rate risk
A
- type of systematic risk
- if Fed changes interest rates all bonds/fixed income instruments will be affected
- risk that a security’s value will decline because of a rise in interest rates
- common shares of public utility companies would so be effected bc of
- liberal dividend policies
- highly levered
-reduce through laddering (bonds purchased at the same time but mature at different times
4
Q
reinvestment risk
A
- might be unable to reinvestment at the same rate as previously
5
Q
inflation risk
A
- purchasing power risk
- inflation reduces buying power
- fixed income investments are most vulnerable
- TIPS are designed to protect against inflation risk
6
Q
nonsystematic (unsystematic) risk
A
- can be reduced by diversification
- risks that are specific to industries, business enterprise
- business, financial, liquidity, political, regulatory risks
7
Q
business risk
A
- an operating risk, generally caused by poor management decisions
- highest risk for investors whose portfolios contain stock in only one issuer or lower rated bonds
8
Q
financial risk
A
- companies that use debt financing (leverage)
- inability to meet debt obligations
- credit risk or default risk
9
Q
regulatory risk
A
- sudden change in regulatory climate
10
Q
legislative risk
A
- results from changes to laws (like changes to take code)
11
Q
political risk
A
- potential instability
12
Q
sovereign risk
A
- risk of country defaulting on its commercial debt obligations
13
Q
liquidity risk
A
- risk that when an investor wishes to dispose of an investment no one will be willing to buy it or that a large purchase/sale wouldn’t be possible at the current price
- marketability risk
14
Q
currency or exchange rate risk
A
- risk of currency fluctuations impacting the value of your investment
15
Q
control relationships
A
- conflicts of interest
- when a broker dealer is owned by, is under common ownership with, or owns an entity that issues securities