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12 Questions

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Investment Decision Making Review Quiz

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Questions and Answers

What is the ideal beta for a risk-averse investor?

0.5 (correct)

2.0

1.5

1.0

How can nondiversifiable risk be mitigated?

Through augmentation of the portfolio's investment count. (correct)

By opting for investments characterized by minimal intercorrelation.

Through adept portfolio management and precise market timing.

Via the implementation of derivative-based hedging strategies and strategic asset allocation.

Which statement does not accurately characterize diversification?

Diversification encompasses dispersing investments across various asset classes to diminish risk.

Diversification guarantees amplified returns through consolidating investments within a sole asset class. (correct)

Diversification aids in lessening the repercussions of adverse occurrences impacting a particular sector or industry.

Diversification endeavors to curtail the comprehensive risk of a portfolio while upholding potential returns.

What investment action is recommended for a stock with high sensitivity to market movements?

Diversify the portfolio by reducing exposure to the high-beta stock. Signup and view all the answers

Why might transferring risks to other parties not effectively spread risks?

It provides limited diversification opportunities. Signup and view all the answers

What could be a potential drawback of accepting and managing risks directly?

Potentially lower returns. Signup and view all the answers

Why might transferring risks to insurance companies result in higher transaction costs?

Third-party entities may charge higher transaction fees. Signup and view all the answers

What is a potential consequence of transferring risks to other parties in terms of liquidity and flexibility?

Restricted liquidity and flexibility in adjusting investment positions. Signup and view all the answers

What financial highlights are provided for SAS (Statistical Analysis System)?

Return on Assets, Dividend Payout Ratio, Debt/Equity Ratio, Interest rate on Debt, Corporate tax rate Signup and view all the answers

What is the formula for Expected Growth Rate as per the given information?

Expected Growth Rate = Retention Rate (ROA + DE (ROA – Interest Rate*(1-tax rate) Signup and view all the answers

During which phase is SAS (Statistical Analysis System) currently operating?

High-growth phase Signup and view all the answers

What is the expected future status of SAS (Statistical Analysis System)?

It is expected to become a stable firm in ten years Signup and view all the answers

Study Notes

Risk Management

A risk-averse investor's ideal beta is close to 0, indicating minimal market risk exposure.
Nondiversifiable risk can be mitigated through hedging or asset allocation strategies.

Diversification

Diversification does not guarantee a profit or protect against loss.
Diversification is characterized by reducing risk through spreading investments across various asset classes.

Investment Actions

For a stock with high sensitivity to market movements, a recommended investment action is to hedge or diversify the portfolio.

Risk Transfer

Transferring risks to other parties may not effectively spread risks if the counterparties are also vulnerable to the same risks.
A potential drawback of accepting and managing risks directly is that it may require significant resources and expertise.
Transferring risks to insurance companies may result in higher transaction costs due to the insurer's profit margin and administrative fees.
A potential consequence of transferring risks to other parties is the loss of liquidity and flexibility in investment decisions.

SAS (Statistical Analysis System)

Financial highlights provided for SAS include revenue growth, market share, and product offerings.
The formula for Expected Growth Rate is not provided.
SAS is currently operating in the maturity phase.
The expected future status of SAS is that it will likely maintain its market position and continue to evolve with advancements in technology.

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Description

Test your understanding of investment decision making, including whether to buy or sell a particular investment, fundamentals, nature of risks and return, measurement, and the impact of international and domestic factors in a portfolio. The quiz covers topics such as trading process, risk treatment implementation, conversion ratio of convertible bonds, and stock liquidation including the concept of preferred shares and common stock shares.