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Flashcards in Financial Risk Management (M43) Deck (79)
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1

There is a trade-off between risk and returns when considering investments - to achieve _____ returns an investor must assume greater risk

Higher

2

Most financial models assume that investors are risk ____

Averse

3

This does not mean that investors will not take risks, it means that they must be compensated for taking risk

Risk Aversion

4

Investors that prefer to take risks and would invest in a higher-risk investment despite the fact that a lower-risk investment might have the same return

Risk-Seeking Investors

5

Investors that prefer investments with higher returns whether or not they have risk. These investors disregard risk.

Risk-Neutral Investors

6

Computes the expected returns by adding the historical returns for a number of periods and dividing by the number of periods

Arithmetic Average Return

7

This computation of expected returns depicts the compound annual return earned by an investor who bought the asset and held it for the number of historical periods examined.

Geometric Average Return

8

If returns vary through time, the geometric average will always fall _____ (below/above) the arithmetic average

Below

9

It is generally recommended that the arithmetic average return be used for assets with _____ (short/long) holding periods

Short

10

It is generally recommended that the geometric average return be used for assets with _____ (short/long) holding periods

Long

11

the Coefficient of Variation =

Standard Deviation /
Expected Return

12

The ____ the Coefficient of Variation, the higher the risk

Greater

13

The ____ the Coefficient of Variation, the lower the risk

Lower

14

This is a measurement of risk

Coefficient of Variation

15

This is the risk that exists for one particular investment or a group of like investments

Unsystematic Risk

16

This is the risk that relates to market factors that cannot be diversified away

Systematic Risk

17

All investments, to some degree, and affected by _____ risk

Systematic

18

By having a balanced portfolio, investors can theoretically eliminate ____ risk

Unsystematic Risk

19

Examples of ____ risk factors include fluctuations in GDP, inflation, interest rates, etc.

Systematic

20

This describes the investor's trade off between risk and return

Risk Preference Function

21

A portfolio that falls on the line described by the risk preference function is described as a ____ portfolio

Efficient

22

A negative beta in a portfolio is ____ (good/bad) because....

Good

It diversifies (if the rest of the portfolio goes down, this investment will go up)

23

A positive beta in a portfolio is ____ (good/bad) because....

Bad

It is riskier because it provides little-to-no diversification

24

This is the risk that the firm will default on payment of interest or principal of the loan or bond

Credit or Default Risk

25

This is the risk that the value of the loan or bond will decline due to an increase in interest rates

Interest Rate Risks

26

The risk that the value of the loan or bond will decline due to a decline in the aggregate value of all the assets in the economy

Market Risk

27

Credit Risk is divided into two parts: the individual firm's ________ and ________

Creditworthiness (Risk of Default)

Sector Risk (Risk related to economic conditions in the firm's economic sector)

28

Credit Risk is an example of a(n) _____ (systematic/unsystematic) risk

Unsystematic

29

Credit Risk ____ (can/cannot) be eliminated by diversification

CAN

30

Market Risk is an example of a(n) _____ (systematic/unsystematic) risk

Systematic Risk