MORE Know HOW Flashcards

1
Q

WHAT is being maximized when maximizing utility in economics?

A

SATISFACTION is being maximized

i.e. An individual that demands a particular good does so because of the utility (satisfaction) he receives from consuming it

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2
Q

WHAT type of returns may a firm experience in the Long-Run?

A

Increasing returns

WHY? - Because of economies of scale

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3
Q

HOW can management hedge against transaction risk related to changes in the value of a foreign currency?

A

By using a forward contract

e.g. selling yen using a forward contract

management locks in the purchase price and therefore avoid a significant gain or loss

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4
Q

WHICH one of the COSO Five Components - is a set of standards, processes, and structures that provide the basis for carrying out internal control across an organization?

A

THE Control Environment

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5
Q

WHAT should be included in an internal audit charter, according to the International Standards for the Professional Practice of Internal Auditing?

A

THE Purpose, Authority, and Responsibility of the Internal audit activity

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6
Q

WHAT is NOT an Independence requirement for a director according to the New York Stock Exchange (NYSE)?

A

A director may be an officer for a company that is a significant customer of the corporation he is a director of

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7
Q

WHAT is the “real risk free rate?”

A

THE basic component of interest

NOTE: This is also known as the pure rate of interest

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8
Q

WHO is the most important “stakeholder” in a corporation from the standpoint of Corporate Governance?

A

The Shareholders

i.e. Corporate governance is primarily designed to prevent management from acting in its own interest at the expense of the shareholders

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9
Q

According to COSO, what are individuals within a company that monitor internal controls referred to as?

A

THEY are called “Evaluators”

NOTE: The evaluator’s objectivity refers to whether that person can evaluate the controls without concern about possible consequences of discovering deficiencies

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10
Q

WHAT are the two basic types of investment risks?

A

Systematic Risk and Unsystematic Risk

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11
Q

WHAT is Systematic Risk?

A

Systematic Risk also known as “market risk,”

Is risk faced by all firms AND cannot be diversified

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12
Q

WHAT is Unsystematic Risk?

A

Unsystematic Risk also known as “unique risk,”
Is risk inherent in a particular security.

NOTE: this type of risk can be diversified

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13
Q

WHAT is Monte Carlo simulation?

A

THEY are simulations that use a random-number procedure to generate values for the inputs

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14
Q

WHAT Risk is Associated with a Single Stock?

A

Unsystematic Risk

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15
Q

Fill in the Blank

The most likely sales volume is the one with ______.

A

THE greatest probability

WHY? - Because Probability estimation techniques assist in making the best decisions in the face of uncertainty

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16
Q

WHAT tool would be used to determine the best course of action under conditions of Uncertainty?

A

EXPECTED VALUE (EV)

WHY? - Because Expected value analysis provides a rational means for selecting the best alternative in decisions involving risk

NOTE: The equation for EV is: Probability of each outcome multiplied by payoff and summing the products

17
Q

WHAT is Sensitivity Analysis?

A

AN appropriate technique to analyze alternatives by using expected inputs and altering them before a decision is made

i.e. Sensitivity analysis examines how the model’s outcomes change as the parameters change

18
Q

WHAT is Probability (Risk) Analysis?

A

AN extension of Sensitivity Analysis

HOW? - Because it evaluates both the probabilities and effects of differing inputs or outputs

19
Q

WHAT is “Company Unique Risk?”

A

Another name for “Unsystematic risk” or “Diversifiable risk”

i.e. This is the the risk inherent in a particular investment security

20
Q

WHAT is Inflation Risk?

A

THE risk that purchasing power will be lost while the loan is at the borrower’s disposal

e.g. If inflation is expected to be lower in the future, investors are willing to accept a lower yield because overall purchasing power will be increased