Risk Flashcards
Company specific risk
(diversifiable risk, unsystematic riks) includes those elements of business risk that can be eliminated through diversification. (of projects, investments, etc.)
What kind of risk cannot be mitigated through diversification of investments?
Systematic risk.
In prospect of future periods of high inflation, what type of investment is best?
precious metals. value will increase during periods of high inflation. Bonds, stocks, interest rate increased therefore value decreases
Interest rate risk
that the market rate of interest will go up, causing the value of outstanding debt (issued at a lower interest rate) to go down. Generally a nondiversifiable risk
What is business risk?
the broad macro-risk a firm faces largely as a result of the relationship between the firm and the environment in which it operates. Measured as the expected variability in EBIT
If a firm utilizes only equity financing, what risk is inherent in the firms operations?
business risk
Diversifiable risks are also called
Unsystematic risks, firm specific
What types of risks are generally a non diversifiable risk?
inflation risk
Interest rate risk
What type of investment does not have an interest rate risk?
fixed interest bearing investments that are held to maturity
Describe non diversifiable risk.
Also called systematic risk, market-related risk. Elements of risk that cannot be eliminated through diversification of the investments, usually derives from general economic and political factors.
Default risk
the risk assoc with the possibility that the issuer of a security will not be able to make future interest payments and / or principal repayment
What is basis risk?
the risk of less from ineffective hedging activities
