Unit 11 Flashcards

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1
Q

Systematic Risks

A

The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company’s circumstances

  • cannot be diversified away
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2
Q

Market risk

A

when the market tanks, virtually all securities lose value

  • measured by a security’s beta
  • cannot be diversified away
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3
Q

Interest Rate Risk

A

Risk that interest rate changes will affect bond prices

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4
Q

Reinvestment Risk

A

Risk that you will not be able to reinvest your money at the same return

  • 0 coupon bonds avoid this risk because there is nothing to reinvest
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5
Q

Inflation Risk (Purchasing Power Risk)

A
  • TIPS are one investment vehicle designed to protect against inflation risk
  • fixed-income securities are the most vulnerable to this risk
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6
Q

Unsystematic risks

A

can be reduced through diversification

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7
Q

Business risk

A
  • generally caused by poor management

- highest for investors whose portfolios contain stock in only one issuer or in lower rated bonds

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8
Q

Financial risk

A

The risk that the inability to meet debt obligations could lead to bankruptcy and total loss for the stockholders.

Related primarily to those companies that use debt financing (leverage)

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9
Q

Credit (Default) Risk

A

If the exam asks for a security without credit risk, it is common stock because there is no obligation to pay back a debt.

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10
Q

Regulatory Risk

A

The risk that comes from a change in regulations

  • “Green” industries, industries that tend to pollute, oil and gas exploration, airlines, and pharmaceutical manufacturers
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11
Q

Legislative Risk

A

Risk of changes in the law such as changes to the tax code

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12
Q

Political Risk

A

Potential instability in the political underpinnings of the country

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13
Q

Sovereign Risk

A

Risk of a country defaulting on its commercial debt obligations

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14
Q

Country Risk

A

monitors the political and economic stability of countries, it’s the total risk of investing in the obligations of that country and includes political and sovereign risk

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15
Q

Liquidity risk

A

the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price

  • for exam purposes, also called
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16
Q

Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that

A

any change in fundamental investment policy must be approved by stockholders