Sophia Finance Challenge 03 answers

Sophia Finance Challenge 03 answers You loan a friend $5,000. There is a 15% chance your friend will pay you a 3% return, a 40% chance he will pay you a 2% return and a 45% chance he will pay you only a 1% return. What is your expected return after one year? a.) 1.80% b.) 2.05% c.) 1.70% d.) 2.20% Why is it a good idea to diversify an investment portfolio? a.) To reduce specific risk. b.) To eliminate variance. c.) To maximize potential returns. d.) To reduce systemic risk. Which of the following is true of portfolio diversification? a.) A diversified portfolio will always prevent an investor from losing money. b.) A diversified portfolio is more sensitive to an investor's time frame and risk tolerance. c.) A diversified portfolio will increase variance, without compromising returns. d.) A diversified portfolio is less affected by systemic risk. Which of the following is true of portfolio diversification? a.) Diversification can reduce or eliminate specific risk, but not systemic risk. b.) Diversification can eliminate or reduce specific risk or systemic risk, depending on asset class. c.) Diversification can reduce or eliminate systemic risk, but not specific risk. d.) Diversification can reduce or eliminate both specific risk and systemic risk. Which of the following credit ratings would make a country or company have the most difficult time raising capital? a.) AA b.) A c.) BBB d.) B What is the effect of a merger or acquisition announcement on the stock price of a company involved in the restructuring? a.) It will likely increase because analysts add together the stock prices of the companies involved. b.) M&A announcements typically have little effect on the stock price of the companies involved. c.) It will likely decrease because M&A announcements are a signal of market instability. d.) It could increase or decrease, depending on how analysts interpret the long term outlook of the company. Surprise news or announcements may affect the day to day variance of a stock's price, also known as its __________. a.) credit-worthiness b.) beta c.) market share d.) fundamental analysis The risk that your investment in a stock will lose value because of a general economic decline is known as __________. a.) market risk b.) interest rate risk c.) foreign investment risk d.) model risk The risk that the person to whom you lent money will not be able to pay you back is known as __________. a.) liquidity risk b.) credit risk c.) market risk d.) model risk The risk that you will not be able to immediately convert a non-cash asset into cash when you need it is known as __________. a.) liquidity risk b.) default risk c.) operational risk d.) asset-backed risk