ch 14 Flashcards

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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
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2
Q

market risk

A
  • type of systematic risk
  • when the market goes down, so do securities
  • measured by security’s beta
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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
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4
Q

reinvestment risk

A
  • might be unable to reinvestment at the same rate as previously
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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
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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
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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
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8
Q

financial risk

A
  • companies that use debt financing (leverage)
  • inability to meet debt obligations
  • credit risk or default risk
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9
Q

regulatory risk

A
  • sudden change in regulatory climate
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10
Q

legislative risk

A
  • results from changes to laws (like changes to take code)
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11
Q

political risk

A
  • potential instability
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12
Q

sovereign risk

A
  • risk of country defaulting on its commercial debt obligations
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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
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14
Q

currency or exchange rate risk

A
  • risk of currency fluctuations impacting the value of your investment
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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
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16
Q

regulation full disclosure (FD)

A
  • SEC rule
  • issuers must disclose info that can affect stock prices
  • prompt disclosure (next trading day)
  • public conference calls, press releases/conferences, webcasts are FD compliant
  • Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company’s material disclosures at the same time.
17
Q

tender offers

A
  • one company attempts to takeover another by acquiring voting shares
  • need shareholder approval
  • requires adequate disclosure to clients
  • tender is at a premium
  • there is a time limit
  • must remain open unless withdrawn for at least 20 business days from the date the offer is announcement
  • if terms of offer change, revised offer must remain open for at least 20 days from commencement and 10 business dat from the date the terms are changed
  • target company within 10 business days must provide shareholders: acceptance/rejection of the offer, no opinion on the offer, unable to take a position on the offer
18
Q

short tendering

A
  • prohibited
  • shareholders can only tender shares they own
19
Q

partial tender

A
  • less than 100% of the outstanding shares
  • holders of convertible securities can tender without converting, only must convert if the tender is accepted
20
Q

SEC rule 10b-18

A
  • issuer buying back its own stock in the open market
  • transaction cannot affect the opening or closing
  • transactions can be executed at prices no higher than the highest independent bid or last reported sale
21
Q

senior exploitation

A
  • wrongful unauthorized taking, withholding, appropriation of securities
  • any act or omission, including power of attorney
  • prevent by
    • clear procedures
    • plan for how personnel handles
    • training
    • preemptive action
    • keep with with regulations
22
Q

soft dollars

A
  • allocating money to pay for research
  • must be disclosed but falls under safe harbor
  • . Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees.
23
Q

safe harbor

A
  • method of behavior that avoids running afoul of the law
24
Q

rehypothecate

A

In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer’s account.