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Questions and Answers
What is the primary purpose of diversification in an investment portfolio?
What is the primary purpose of diversification in an investment portfolio?
Which of the following investments is considered lower risk compared to corporate bonds?
Which of the following investments is considered lower risk compared to corporate bonds?
What does the formula $β_{p} = \frac{Cov(r_{p},r_{m})}{Var(r_{m})}$ measure in finance?
What does the formula $β_{p} = \frac{Cov(r_{p},r_{m})}{Var(r_{m})}$ measure in finance?
Which of the following best defines risk in finance?
Which of the following best defines risk in finance?
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How is the standard deviation (σ) related to investment risk?
How is the standard deviation (σ) related to investment risk?
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What is the main purpose of this Self-Learning Module?
What is the main purpose of this Self-Learning Module?
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Who is responsible for the editorial content of the module?
Who is responsible for the editorial content of the module?
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What is included at the end of each module for self-assessment?
What is included at the end of each module for self-assessment?
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Who is the main author of Module 10: Investment Risks?
Who is the main author of Module 10: Investment Risks?
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What does the module provide to help facilitators and parents assist students?
What does the module provide to help facilitators and parents assist students?
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What is the significance of the pre-tests provided in the module?
What is the significance of the pre-tests provided in the module?
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What type of feedback is expected from students regarding answer keys?
What type of feedback is expected from students regarding answer keys?
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Who oversees the overall management of the educational module?
Who oversees the overall management of the educational module?
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What characterizes systematic risk in investments?
What characterizes systematic risk in investments?
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Which of the following is an example of non-systematic risk?
Which of the following is an example of non-systematic risk?
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How is market risk predominantly measured?
How is market risk predominantly measured?
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What is one consequence of equity risk?
What is one consequence of equity risk?
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Which of the following best describes interest rate risk?
Which of the following best describes interest rate risk?
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What typically happens to equity prices during a recession?
What typically happens to equity prices during a recession?
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Which risk is described as 'undiversifiable'?
Which risk is described as 'undiversifiable'?
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What might high systematic risk indicate for an investor?
What might high systematic risk indicate for an investor?
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What is Horizon Risk primarily related to?
What is Horizon Risk primarily related to?
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Longevity Risk mainly concerns which group of individuals?
Longevity Risk mainly concerns which group of individuals?
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Which of the following best describes Foreign Investment Risk?
Which of the following best describes Foreign Investment Risk?
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How can diversification benefit an investor?
How can diversification benefit an investor?
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What is the purpose of investing consistently (averaging)?
What is the purpose of investing consistently (averaging)?
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What does the measurement 'Beta (β)' assess?
What does the measurement 'Beta (β)' assess?
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Which of the following strategies is most effective for achieving higher returns?
Which of the following strategies is most effective for achieving higher returns?
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What risk is associated with a country's economic stability when investing abroad?
What risk is associated with a country's economic stability when investing abroad?
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What is defined as the probability or uncertainty of losses rather than profit from investment?
What is defined as the probability or uncertainty of losses rather than profit from investment?
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Which term describes the risk of being unable to sell securities at a fair price?
Which term describes the risk of being unable to sell securities at a fair price?
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Which risk is related to the potential loss of investment value due to economic events affecting the market?
Which risk is related to the potential loss of investment value due to economic events affecting the market?
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Credit risk specifically refers to which type of potential loss?
Credit risk specifically refers to which type of potential loss?
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What is the risk of losing purchasing power due to inflation called?
What is the risk of losing purchasing power due to inflation called?
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Which risk might arise from an unforeseen situation affecting a person's job status?
Which risk might arise from an unforeseen situation affecting a person's job status?
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Which type of risk is associated with the inability to convert investments to cash quickly?
Which type of risk is associated with the inability to convert investments to cash quickly?
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What type of risk is associated with the inability to sell securities at a fair price?
What type of risk is associated with the inability to sell securities at a fair price?
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Which risk arises from the potential for the value of investments to decline due to inflation?
Which risk arises from the potential for the value of investments to decline due to inflation?
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Inflation risk is most likely a concern when?
Inflation risk is most likely a concern when?
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Which risk is characterized by the potential loss from investing too heavily in one security?
Which risk is characterized by the potential loss from investing too heavily in one security?
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What is the primary concern of credit risk in bond investments?
What is the primary concern of credit risk in bond investments?
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Re-investment risk occurs when an investor must reinvest at a rate lower than what was previously earned. What impact does this have?
Re-investment risk occurs when an investor must reinvest at a rate lower than what was previously earned. What impact does this have?
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In the context of currency risk, what does depreciation of the US dollar to the Indian Rupee mean for an investment in US dollars?
In the context of currency risk, what does depreciation of the US dollar to the Indian Rupee mean for an investment in US dollars?
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What happens to the market value of debt securities when interest rates decrease?
What happens to the market value of debt securities when interest rates decrease?
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What risk is associated with losing money due to the inability to sell investments during a market downturn?
What risk is associated with losing money due to the inability to sell investments during a market downturn?
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Study Notes
Business Finance Module 10: Investment Risk
- This module covers investment risks and how to mitigate them
- Investment risk is the chance that actual returns will differ from expected returns
- Risk includes the possibility of losing some or all of your investment
- Standard deviation is a common metric for assessing risk
Investment Risk Categories
-
Systematic Risk: Uncertainty inherent in the overall market
- Examples: changes in interest rates, recessions, wars
- Risk is undiversifiable
-
Non-systematic Risk: Uncertainty specific to a company or industry
- Examples: rumors of a potential default, labor strikes
- Risk is diversifiable
Types of Investment Risk
-
Market Risk: The risk of an investment losing value due to factors affecting the entire market
- Equity Risk: volatility in share prices
- Interest Rate Risk: value of debt securities impacted by interest rates
- Currency Risk: value of foreign investments affected by exchange rate fluctuations
- Liquidity Risk: Difficulty selling securities at a fair market price due to low market demand
- Concentration Risk: Loss due to investment in a single security or one type of security
- Credit Risk: Risk of a bond issuer defaulting on its obligations
- Re-investment Risk: Risk of lower returns when reinvesting principal or income in a lower interest rate environment, particularly relevant when bonds mature or interest payments are due
- Inflation Risk: Loss of purchasing power due to inflation outpacing investment returns.
- Horizon Risk: Reduced investment horizon due to unforeseen circumstances; e.g., job loss
- Longevity Risk: Possibility of outliving savings, particularly for retirees
Minimizing Investment Risk
- Diversification: Spreading investments across different assets and sectors
- Consistent Investing (Averaging): Investing small sums at regular intervals to mitigate the impact of market volatility.
- Long-term Investing: Potentially higher returns over time despite short-term volatility
Measuring Investment Risk
-
Beta (β): Measures a security's volatility in relation to the market as a whole
- Higher Beta means higher market sensitivity
- Standard Deviation (σ): Measures the total volatility of an investment's returns
Low-Risk Investments
- Typically safer than other investment options like options or highly speculative stocks
- Examples include treasury bonds, corporate bonds, and some types of stocks.
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Description
This module delves into various types of investment risks, including systematic and non-systematic risks. Understand how risks can affect returns and learn strategies for mitigating these risks. Key metrics like standard deviation are also discussed to assess investment risk.
