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Questions and Answers
What is the simple meaning of risk?
What is the simple meaning of risk?
- Behavior of investor
- Interest rate risk
- Purchasing power risk
- Hazard (correct)
What is the behavior of a risk averse investor?
What is the behavior of a risk averse investor?
- Prefers higher risk for additional return
- Prefers investment with lower risk for a given level of return (correct)
- Does not focus on risk component and pays more attention on
- Taking positions in two or more investments in such a level that
What do risk neutral investors focus on?
What do risk neutral investors focus on?
- Lower risk for a given level of return
- Risk component (correct)
- Proportionate increase in return will be lesser than proportionate increase in risk
- Higher risk for additional return
What do risk seeker or risk lover investors prefer?
What do risk seeker or risk lover investors prefer?
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Which approach can be used to hedge the interest rate risk of a bond?
Which approach can be used to hedge the interest rate risk of a bond?
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Study Notes
Understanding Risk
- Risk is the probability of loss or adverse outcomes in decision-making or investments.
Risk-Averse Investors
- Opt for lower-risk investments to avoid potential losses, sacrificing higher returns for safety.
- Prioritize capital preservation and prefer investments with steady, reliable returns.
Risk-Neutral Investors
- Focus solely on expected returns without concern for the potential volatility or risk.
- Make decisions based on the highest average potential outcome, regardless of risk levels involved.
Risk-Seeking or Risk-Loving Investors
- Prefer higher-risk investments with the potential for substantial gains.
- Embrace uncertainty and are willing to incur losses for the chance of increased returns.
Hedging Interest Rate Risk
- Utilize various financial instruments, such as interest rate swaps, options, or futures, to minimize the impact of fluctuating interest rates on bond investments.
- Hedging strategies aim to protect against potential declines in bond values due to rising interest rates.
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Test your knowledge on investment risk attitudes and investor behaviors towards risk, including risk averse, risk neutral, and risk seeker attitudes.
