Questions and Answers
Market risk (systematic risk) is the risk associated with the specific business decisions of a company's manager.
False
The term risk refers to the uncertainty that an investment will earn less than its historical return.
False
Regulatory risk is the risk that the regulatory environment in which a company operates will change as a result of legislation.
False
Standard deviation is a measure of inflationary pressures on the performance of a company.
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All of the following risks are considered diversifiable EXCEPT
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The uncertainty resulting from the possibility that the value of an investment will be affected by a change in the law is known as:
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The common stock of the YXZ Pharmaceutical Corporation, listed on the NYSE, is likely to be subject to:
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You recently took a trip to Warsaw, Poland and when you received your credit card statement, you noticed that your vodka purchase for 100 Polish Zlotys resulting in a $30 charge. Based on this exchange rate, each dollar was worth approximately:
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Which of the following is a risk common to all fixed income securities?
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Which of the following statements about diversification are TRUE?
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Study Notes
Market Risk and Systematic Risk
- Market risk, also known as systematic risk, refers to the potential for overall market fluctuations to negatively affect the performance of securities, regardless of the company's specific situation.
Understanding Risk
- The term "risk" in finance is defined as the uncertainty that an investment will achieve its expected rate of return, not just its historical return.
Regulatory Risk
- Regulatory risk involves the potential changes in the rule set governing a business, stemming from new regulations as opposed to legislation, which is enacted by elected political bodies.
Standard Deviation
- Standard deviation measures an investment's volatility, indicating how much the investment's returns deviate from its average return, rather than measuring inflationary pressures.
Diversifiable Risks
- Purchasing power risk (inflation risk) is a systematic risk and cannot be mitigated through diversification, unlike currency, liquidity, and sovereign risks which are considered diversifiable.
Legislative Risk
- Legislative risk pertains to the uncertainty regarding how changes in laws could influence the value of an investment, distinct from business and credit risks.
Risks Associated with Common Stock
- Common stock, such as that of YXZ Pharmaceutical Corporation, inherently carries business risk; it also faces regulatory risk due to the nature of the pharmaceutical industry, while credit risk and liquidity risk are generally not significant factors.
Currency Exchange Rate
- When converting foreign currency transactions to U.S. dollars, the exchange rate can be calculated by dividing the foreign purchase amount by the dollar charge, exemplified by the 100 Polish Zlotys costing $30, resulting in each dollar equating to approximately 3.33 Zlotys.
Fixed Income Securities Risk
- Interest rate risk is inherent to all fixed income securities as changes in interest rates affect the income produced by these investments, which remains fixed.
Diversification Strategies
- Diversification is a defensive investment strategy aimed at reducing unsystematic risk by spreading investments across different asset classes, contrasting with concentration strategies that focus investments in fewer categories.
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Description
A set of flashcards covering key concepts in finance, including market risk and investment return. Test your knowledge of financial terminology and concepts.
