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1. Risk and Return

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66 views2 pages

1. Risk and Return

Uploaded by

Jessa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Part 2 : Risk and Return

Question 1 - CIA 1190 IV.51 - Risk and Return

The risk that securities cannot be sold at a reasonable price on short notice is called

A. Interest-rate risk.
B. Liquidity risk.
C. Default risk.
D. Purchasing-power risk.

A. Because interest-rate risk is the risk to which investors are exposed because of changing interest rates.

B. An asset is liquid if it can be converted to cash on short notice. Liquidity (marketability) risk is the risk that
assets cannot be sold at a reasonable price on short notice. If an asset is not liquid, investors will require a
higher return than for a liquid asset. The difference is the liquidity premium.

C. Because default risk is the risk that a borrower will not pay the interest or principal on a loan.

D. Because purchasing-power risk is the risk that inflation will reduce the purchasing power of a given sum of money.

Question 2 - CIA 1191 IV.60 - Risk and Return

The risk of loss because of fluctuations in the relative value of foreign currencies is called

A. Expropriation risk.
B. Multinational beta.
C. Undiversifiable risk.
D. Exchange rate risk.

A. Expropriation risk is the risk that a government will seize the assets of a company without providing fair market
compensation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. Undiversifiable risk is the amount of risk that may not be eliminated through the proper diversification of a portfolio.

D. By definition, exchange rate risk is the risk of loss that will result from fluctuations in foreign currency
exchange rates.

Question 3 - CMA 697 1.11 - Risk and Return

When purchasing temporary investments, which one of the following best describes the risk associated with the ability to
sell the investment in a short period of time without significant price concessions?

A. Financial risk.
B. Purchasing-power risk.
C. Interest-rate risk.
D. Liquidity risk.

A. Because financial risk is the risk borne by shareholders, in excess of basic business risk, that arises from use of
financial leverage (issuance of fixed income securities, i.e., debt and preferred stock).

B. Because purchasing-power risk is the risk that a general rise in the price level (inflation) will reduce what can be

(c) HOCK international, page 1


Part 2 : Risk and Return

purchased with a fixed sum of money.

C. Because interest-rate risk is caused by fluctuations in the value of an asset as interest rates change. Its components
are price risk and reinvestment-rate risk.

D. Liquidity risk is the possibility that an asset cannot be sold on short notice for its market value. If an asset
must be sold at a high discount, it is said to have a substantial amount of liquidity risk.

Question 4 - HOCK RRI 91 - Risk and Return

Systematic risk is

A. risk that can be diversified away by holding securities in a diversified portfolio.


B. risk that can be quantified.
C. the possibility that an investment cannot be sold (converted into cash) for its market value.
D. risk that cannot be diversified away by holding securities in a diversified portfolio.

A. Systematic risk is not risk that can be diversified away.

B. Systematic risk cannot be quantified. (Quantify means to determine the amount of something.)

C. The possibility that an investment cannot be sold for its market value is liquidity risk.

D.

Systematic risk, also called market risk, is risk that cannot be diversified away. It is created by the fact that
economic cycles affect all businesses, and publicly-held investments are traded in a market that can go up and
down with economic news. Systematic, or market, risk cannot be diversified away, and all investments are
subject to it.

(c) HOCK international, page 2

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