Chapter 20 - Investment Risks

Question 1

Beta measures an investment’s _____ risk and alpha measures an investment’s _____ risk.

Answer 1

systematic; non-systematic

Question 2

Measures a bond’s sensitivity to interest rate changes.

Answer 2

Duration

Question 3

Taking what a stock actually earned and subtracting its expected return results in:

Answer 3

alpha

Question 4

Interest rate - inflation rate =

Answer 4

real interest rate

Question 5

All known relevant information is reflected in a security’s price.

Answer 5

Efficient Market Theory

Question 6

Which types of investments have historically shown a great deal of sensitivity to regulatory risk?

Answer 6

Limited partnerships

Question 7

Market risk, interest-rate risk, and inflation risk are all types of:

Answer 7

systematic risk

Question 8

An investor who has a diversified portfolio of large-cap stocks could use index options to reduce which of the following risks?
A) Timing risk
B) Interest-rate risk
C) Systematic risk
D) Non-systematic risk

Answer 8

C) Systematic risk

Question 9

A company is importing goods from Europe and is concerned about the falling value of the US dollar. To protect itself from this currency risk, the company could:

Answer 9

Purchase call options on the foreign currency

Question 10

A client sells the shares she owned of a company whose stock is a major market index. If the proceeds are reinvested in an SP 500 Index Fund, the client has reduced what risk?

Answer 10

Business Risk

Question 11

The primary concern for investors who use a buy-and-hold strategy to maintain their portfolios is:

Answer 11

The allocation of assets