MORE Know HOW Flashcards
WHAT is being maximized when maximizing utility in economics?
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
WHAT type of returns may a firm experience in the Long-Run?
Increasing returns
WHY? - Because of economies of scale
HOW can management hedge against transaction risk related to changes in the value of a foreign currency?
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
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?
THE Control Environment
WHAT should be included in an internal audit charter, according to the International Standards for the Professional Practice of Internal Auditing?
THE Purpose, Authority, and Responsibility of the Internal audit activity
WHAT is NOT an Independence requirement for a director according to the New York Stock Exchange (NYSE)?
A director may be an officer for a company that is a significant customer of the corporation he is a director of
WHAT is the “real risk free rate?”
THE basic component of interest
NOTE: This is also known as the pure rate of interest
WHO is the most important “stakeholder” in a corporation from the standpoint of Corporate Governance?
The Shareholders
i.e. Corporate governance is primarily designed to prevent management from acting in its own interest at the expense of the shareholders
According to COSO, what are individuals within a company that monitor internal controls referred to as?
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
WHAT are the two basic types of investment risks?
Systematic Risk and Unsystematic Risk
WHAT is Systematic Risk?
Systematic Risk also known as “market risk,”
Is risk faced by all firms AND cannot be diversified
WHAT is Unsystematic Risk?
Unsystematic Risk also known as “unique risk,”
Is risk inherent in a particular security.
NOTE: this type of risk can be diversified
WHAT is Monte Carlo simulation?
THEY are simulations that use a random-number procedure to generate values for the inputs
WHAT Risk is Associated with a Single Stock?
Unsystematic Risk
Fill in the Blank
The most likely sales volume is the one with ______.
THE greatest probability
WHY? - Because Probability estimation techniques assist in making the best decisions in the face of uncertainty
WHAT tool would be used to determine the best course of action under conditions of Uncertainty?
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
WHAT is Sensitivity Analysis?
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
WHAT is Probability (Risk) Analysis?
AN extension of Sensitivity Analysis
HOW? - Because it evaluates both the probabilities and effects of differing inputs or outputs
WHAT is “Company Unique Risk?”
Another name for “Unsystematic risk” or “Diversifiable risk”
i.e. This is the the risk inherent in a particular investment security
WHAT is Inflation Risk?
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
