Chapter 15 Introduction to the Portfolio Approach KT

Question 1

The type of risk where an investor will not be able to buy or sell a security quickly enough because buying or selling opportunities are limited.

Answer 1

liquidity risk

Question 2

Spreading investment risk by buying different types of securities in different companies in different kinds of businesses and/or locations.

Answer 2

diversification

Question 3

A statistical measure of risk, expressed as a percentage; the higher the measure for an investment, the greater the volatility of returns and therefore the greater the risk.

Answer 3

standard deviation

Question 4

A rate of return adjusted for the effects of inflation.

Answer 4

real rate of return

Question 5

The type of risk where the value of financial assets and the purchasing power of income will decline due to the impact of inflation on the real returns produced by those financial assets.

Answer 5

inflation rate risk

Question 6

A transactional rate of return measure that takes into account all cash flows and increases or decreases in a security’s value for any time frame.

Answer 6

holding period return

Question 7

A top-down approach to investment, focusing on analyzing the prospects for the overall economy and investing in those sectors that are expected to outperform.

Answer 7

sector rotation

Question 8

A measure of the sensitivity (i.e., volatility) of a stock or a mutual fund to movements in the overall stock market.

Answer 8

beta

Question 9

A non-controllable, non-diversifiable risk that is common to all investments within a given asset class.

Answer 9

systematic risk

Question 10

The type of risk where a debt security issuer will be unable to pay interest on the prescribed date or the principal at maturity.

Answer 10

default risk

Question 11

The rate of return that was actually received by an investor.

Answer 11

ex-post

Question 12

The type of gain from selling a security for less than its purchase price.

Answer 12

capital loss

Question 13

The type of risk where changes in interest rates will adversely affect the value of an investor’s portfolio.

Answer 13

interest rate risk

Question 14

The type of gain from selling a security for more than its purchase price.

Answer 14

capital gain

Question 15

The type of risk associated with a government introducing unfavourable policies making investment in the country less attractive; also, the general instability associated with investing in a country.

Answer 15

political risk

Question 16

A projection of expected returns – what investors expect to realize as a return.

Answer 16

ex-ante

Question 17

The type of risk inherent in a company’s operations, reflected in the variability in earnings.

Answer 17

business risk

Question 18

The risk that the price of a specific security or a specific group of securities will change in price to a different degree or in a different direction from the market as a whole.

Answer 18

non-systematic risk