Sources Of Volatility In Mutual Funds

Question 1

Unique/Specific Risk

Answer 1

Sensitivity of a security’s price to new information lending to changes in demand

How to reduce? Diversify

Question 2

Default Risk

Answer 2

The unique risk that a bond coupon will not be paid

Reduce risk? Avoid specializing in corporate bonds

Question 3

Market Risk

Answer 3

Changes in the overall market affecting an entire class of securities

Reduce risk? None

Question 4

Exchange Rate Risk

Answer 4

Changes in the relative value of the currencies of the countries of investment

Reduce risk? Hedging

Question 5

Interest Rate Risk

Answer 5

Changes in interest rates lending to changes in fixed-income security prices

Reduce risk? Avoid specializing in fixed-income securities