Corporate Finance Chapter 11 Flashcards
Corporate Finance Chapter 11
Market interest rates have risen substantially in the five years since an investor purchased
Treasury bonds that were offering a 7 percent return. If the investor sells now she is likely to
receive:
A. greater than a 7 percent total return.
B. less than a 7 percent total return.
C. a 7 percent total rate of return.
D. a 7 percent nominal return but less than a 7 percent real return.
B. less than a 7 percent total return.
Which of the following risks would be classified as a unique risk for an auto manufacturer?
A. interest rates
B. steel prices
C. business cycles
D. foreign exchange rates
B. steel prices
The risk premium that is offered on common stock is equal to the:
A. expected return on the stock.
B. real rate of return on the stock.
C. excess of expected return over a risk-free return.
D. expected return on the S&P 500 index.
C. excess of expected return over a risk-free return.
Which of the following firms is likely to exhibit the least macro risk exposure?
A. furniture manufacturer
B. oil driller
C. dog food processor
D. auto manufacturer
C. dog food processor
Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to:
A. greater default risk.
B. a higher level of unique risk.
C. greater price risk due to longer maturities.
D. the fact that they are less frequently traded than bills.
C. greater price risk due to longer maturities.
Strategy designed to reduce risk by spreading the portfolio across many investments. This is possible because assets possess two kinds of risks
Diversification
Economy-wide (macroeconomic) sources of risk that affect the overall stock market
Market risk
Risk factors affecting only that firm
Unique risk
a standardized measure of co-movement of the assets
Correlation coefficient
P > 0
positive correlation variables move in the same direction
P < 0
negative correlation variables move in the opposite direction
P = 0
no correlation
Covariance
The degree to which the returns on the two stocks move together
Macro risks
uncertain events affecting the entire securities market and economy. Examples: changes in interest rates, industrial production, inflation, exchange rates and energy cost, COVID-19
Standard deviation and variance are
measures of risk