Unit 4 Flashcards

0
Q

The systematic risk of an individual security is measured by the

A

Covariance

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1
Q

The risk to which all investment securities are subject is known as

A

Systematic risk or market risk

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2
Q

The risk of a single stock is

A

Security risk

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3
Q

The risk inherent in a particular investment security

A

Unsystematic or company risk

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4
Q

The amount received by an investor as compensation for taking on the risk

A

Rate of return=

Return on investment /amount invested

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5
Q

What is the lowest to highest financial instrument?

A
US treasury bond
1st mortgage bond 
2nd mortgage bond 
Subordinated debentures
Income bonds
Preferred stocks
Convertible preferred bond 
Common stock
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6
Q

The risk the issuer of a debt security will default

A

Credit risk

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7
Q

The risk that a foreign currency transaction will be affected by fluctuations in exchange risk

A

Foreign exchange risk

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8
Q

The risk that an investment security will fluctuate in value due to changes in interest rates

A

Interest rate risk

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9
Q

The risk that a change will affect securities issued by firms in a particular industry

A

Industry risk

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10
Q

The probability of loss from actions of governments

A

Political risk

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11
Q

The risk that a security cannot be sold on short notice for its market value

A

Liquidity risk

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12
Q

An investment determined using an expected value calculation

A

Expected rate of return=

Possible rate of return * probability

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13
Q

Measures the tightness of the distribution and the riskiness of the investment

A

Standard deviation

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14
Q

Used when the rate of return and standard deviations of two investments differ. Measures the risk per unit of return.

A

Coefficient of variation

Lower # is better return

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15
Q

Measures the degree to which any two variables are related

A

Correlation coefficient

Has a range from 1.0 to -1.0

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16
Q

The correlation coefficient of two securities can be combined with their standard deviations to arrive at their?
A measure of their mutual volatility.

A

Covariance

17
Q

A key concept in financial planning and money management

A

Asset allocation

18
Q

The risk associated with a specific investee’s operations: new product, patents, acquisitions, competitors’ activities, etc

A

Specific risk, also called diversifiable risk, residual risk, and unique risk

19
Q

The effect of an individual security on the volatility of a portfolio is measured by its sensitivity to movements by the overall market.

A

Beta coefficient

20
Q

Measures how a particular security contributes to the risk and return of a diversified portfolio

A

Capital asset pricing model (CAPM)

21
Q

Two practical problems with the use of CAPM

A
  1. It is hard to estimate the risk-free rate of return on projects under different economic environments
  2. The CAPM is a single-period model. It should not be used for projects lasting more than 1 year
22
Q

Based on the assumption that an asset’a return is a function of multiple systematic risk

A

Arbitrage pricing theory (ABT)

23
Q

Recognizes that two classes of stocks typically perform better than the stock market as a whole

A

Fama-French three factor model

24
Q

The risk of an adverse outcome based on a change in the first particular context

A

Business risk

25
Q

Relates directly to business risk

A

Operating leverage

26
Q

The risk of an adverse outcome based on a change in the financial markets

A

Financial risk

27
Q

Represents combinations of portfolios having equal utility to the investor

A

Indifference curve

28
Q

Two important decisions are involved in managing a company’s protfolio

A

The amount of money to invest

This securities in which to invest

29
Q

Ensures that securities will have to be sold unexpectedly

A

Maturity matching

30
Q

Is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements

A

Hedging

31
Q

Are future contracts that are purchased to protect against price increases

A

Long hedges

32
Q

Are futures contracts that are sold to protect against price declines

A

Short hedges

33
Q

Is a method of reducing financial risk by investing into different items whose performance tends to cancel each other out

A

Natural hedge

34
Q

A type of natural hedge. Involves buying long and short positions in highly correlated stocks

A

Pair trading

35
Q

Involves hedging interest rate risk. duration is the weighted average of the periods of time to interest and principal payments

A

Duration hedging

36
Q

Investor is one with the diminishing marginal utility for wealth the potential game is not worth the additional risk

A

Risk averse

37
Q

Investor adopts an expected value approach

A

Risk neutral

38
Q

Investor has an optimistic attitude toward risk

A

Risk seeking

39
Q

Concerned the composition of an investment portfolio that is an efficient in balancing the risk with the rate of return of the portfolio

A

Portfolio theory

40
Q

A company’s investment in securities should be based on

A

Expected cash flows and cash flow uncertainty evaluations

41
Q

Involve risk-free securities such as treasury bonds T-bills and money market certificates

A

Interest rate futures contracts