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