Flashcards in Financial Risk Management (M43) Deck (79)
There is a trade-off between risk and returns when considering investments - to achieve _____ returns an investor must assume greater risk
Most financial models assume that investors are risk ____
This does not mean that investors will not take risks, it means that they must be compensated for taking risk
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
Investors that prefer investments with higher returns whether or not they have risk. These investors disregard risk.
Computes the expected returns by adding the historical returns for a number of periods and dividing by the number of periods
Arithmetic Average Return
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
If returns vary through time, the geometric average will always fall _____ (below/above) the arithmetic average
It is generally recommended that the arithmetic average return be used for assets with _____ (short/long) holding periods
It is generally recommended that the geometric average return be used for assets with _____ (short/long) holding periods
the Coefficient of Variation =
Standard Deviation /
The ____ the Coefficient of Variation, the higher the risk
The ____ the Coefficient of Variation, the lower the risk
This is a measurement of risk
Coefficient of Variation
This is the risk that exists for one particular investment or a group of like investments
This is the risk that relates to market factors that cannot be diversified away
All investments, to some degree, and affected by _____ risk
By having a balanced portfolio, investors can theoretically eliminate ____ risk
Examples of ____ risk factors include fluctuations in GDP, inflation, interest rates, etc.
This describes the investor's trade off between risk and return
Risk Preference Function
A portfolio that falls on the line described by the risk preference function is described as a ____ portfolio
A negative beta in a portfolio is ____ (good/bad) because....
It diversifies (if the rest of the portfolio goes down, this investment will go up)
A positive beta in a portfolio is ____ (good/bad) because....
It is riskier because it provides little-to-no diversification
This is the risk that the firm will default on payment of interest or principal of the loan or bond
Credit or Default Risk
This is the risk that the value of the loan or bond will decline due to an increase in interest rates
Interest Rate Risks
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
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)
Credit Risk is an example of a(n) _____ (systematic/unsystematic) risk
Credit Risk ____ (can/cannot) be eliminated by diversification