INVESMENT RISKS & CAPITAL MARKETS

Question 1

1. The relevant portion of an asset’s risk attributable to market factors that affect all firms is called
   a. Unsystematic risk
   b. Diversifiable risk
   c. Systematic risk
   d. Controllable risk

Question 2

2. Unsystematic risk is not relevant because
   a. It does not change
   b. It cannot be estimated
   c. It can be eliminated through diversification
   d. It cannot be eliminated through diversification

Question 3

3. This risk represents the portion of an asset’s risk that can be eliminated by combining assets with less than perfect
   positive correlation.
   a. Diversifiable risk
   b. Non-diversifiable risk
   c. Systematic risk
   d. Non-controllable risk

Answer 3

a. Diversifiable risk

Question 4

4. The higher an asset’s beta,
   a. The more responsive it is to changing market returns.
   b. The less responsive it is to changing market returns.
   c. The higher the expected returns will be in a down market.
   d. The lower the expected return will be in an up market.

Answer 4

a. The more responsive it is to changing market returns.

Question 5

5. Under CAPM, the beta coefficient is a measure of __________ risk and an index of the degree of movement of an
   asset’s return in response to a change in the __________.
   a. Diversifiable, prime rate
   b. Non-diversifiable, T-Bill rate
   c. Diversifiable, bond index rate
   d. Non-diversifiable, market return

Answer 5

d. Non-diversifiable, market return

Question 6

6. What relationship does risks and returns normally have?
   a. Direct relationship
   b. Inverse relationship
   c. Spurious relationship
   d. Illicit and discreet relationship

Question 7

7. Risk aversion is the behavior exhibited by managers who require a greater than proportional
   a. Increase in return, for a given decrease in risk.
   b. Increase in return, for a given increase in risk.
   c. Decrease in return, for a given increase in risk.
   d. Decrease in return, for a given decrease in risk.

Answer 7

b. Increase in return, for a given increase in risk.

Question 8

8. It is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.
   a. Coefficient of variation
   b. Chi square
   c. Mean
   d. Standard deviation

Answer 8

a. Coefficient of variation
NOTE: Coefficient of variation = Standard deviation ÷ Expected return

Question 9

9. Financial markets that trade debt securities with maturities of less than 1 year are called:
   a. Money markets
   b. Capital markets
   c. Primary markets
   d. Secondary markets

Answer 9

a. Money markets

Question 10

10. Which of the following financial instruments can be traded in money markets?
    a. Mortgages
    b. Preferred stocks
    c. BSP Treasury Bills
    d. BSP Treasury Bonds

Answer 10

c. BSP Treasury Bills

Question 11

11. The most important considerations with respect to short-term investments are
    a. Return and value
    b. Risk and liquidity
    c. Return and risk
    d. Growth and value

Answer 11

b. Risk and liquidity

Question 12

12. Financial markets in which equity and debt instruments with maturities greater than 1 year are traded are called
    a. Money markets
    b. Capital markets
    c. Currency markets
    d. Private placements

Answer 12

b. Capital markets

Question 13

13. In capital markets, the primary market is concerned with
    a. New issues of bond and stock securities
    b. Exchanges of existing bond and stock securities
    c. Sales of forward or future commodities contracts
    d. New issues of bond and stock securities and exchanges of existing bond and stock securities

Answer 13

a. New issues of bond and stock securities

Question 14

14. The market for outstanding, listed common stock is called
    a. Primary market
    b. New issue market
    c. Secondary market
    d. Over-the-counter market

Answer 14

c. Secondary market