FINALLLLLL chapter 8,9,10,11 finance
Exam Questions and Answers Graded A+
what type of bill does not have any risk - Correct answer-treasury bill
systematic risk is what - Correct answer-in the system
*the one investors care about*
the one that affects the entire economy
what makes systematic risk change - Correct answer--interest rates
-changes in purchasing power
-changes in investor expectations about overall performance of economy
idiosyncratic risk is what - Correct answer-specific to the firm
*portion of variability which is caused by factors unique to security*
variability in security's returns for idiosyncratic risk is caused by factors like: -
Correct answer--management capabilities and decisions
-strikes
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,-availability of raw materials
-unique effects of government regulation, such as pollution control
-effects of foreign competition
-particular levels of financial and operating leverage the firm employees
difference in systematic and idiosyncratic risk - Correct answer-unsystematic risk
can be diversified away while systematic cannot be eliminated with diversification
capital asset pricing model - Correct answer-expected return you should have
based on risk you have
what is risk - Correct answer-risk is the possibility that actual cash flows will be
different than expected cash flows
when is an investment risk free - Correct answer-only if cash flows are known with
certainty
how is risk measured - Correct answer-in terms of variability of returns
-variance
-standard deviation
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,standard deviation - Correct answer-statistical measure of dispersion of possible
outcomes about expected value. It is square root of weighted average squared
deviation of possible outcomes from expected value
larger the standard deviation - Correct answer-the more variables are an
investment's returns and riskier the investment
what has uncertain payoffs - Correct answer-risky investments
what is expected value - Correct answer-statistical measure of most likely outcome
-statistical measure of mean or average value of possible outcomes. The weighted
average of possible outcomes, with weights being probabilities of occurrence
what is normal distribution - Correct answer-bell shaped curve
z-statistic - Correct answer-an observation's distance from expected value in terms
of standard deviation
*used to find probability of observing data point if distribution is normal
risk and required return - Correct answer-required rate of return can be split into a
risk-free rate and a premium for risk
*as level of risk in an investment increases, required rate of return increases*
four components of a risk premium - Correct answer-1) maturity risk
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, 2) default risk
3) seniority risk
4) marketability risk
maturity risk - Correct answer-impact of interest rate changes during life of
investment
*you plot interest rates yields on vertical axis and length of time to maturity on
horizontal axis*
components of risk premium - Correct answer--yield curve
-expectations theory
-liquidity premium theory
-market segmentation theory
default risk - Correct answer-possibility that interest and principal will not be
repaid as promised
seniority risk - Correct answer-in event of default, which claims are paid first?
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Exam Questions and Answers Graded A+
what type of bill does not have any risk - Correct answer-treasury bill
systematic risk is what - Correct answer-in the system
*the one investors care about*
the one that affects the entire economy
what makes systematic risk change - Correct answer--interest rates
-changes in purchasing power
-changes in investor expectations about overall performance of economy
idiosyncratic risk is what - Correct answer-specific to the firm
*portion of variability which is caused by factors unique to security*
variability in security's returns for idiosyncratic risk is caused by factors like: -
Correct answer--management capabilities and decisions
-strikes
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,-availability of raw materials
-unique effects of government regulation, such as pollution control
-effects of foreign competition
-particular levels of financial and operating leverage the firm employees
difference in systematic and idiosyncratic risk - Correct answer-unsystematic risk
can be diversified away while systematic cannot be eliminated with diversification
capital asset pricing model - Correct answer-expected return you should have
based on risk you have
what is risk - Correct answer-risk is the possibility that actual cash flows will be
different than expected cash flows
when is an investment risk free - Correct answer-only if cash flows are known with
certainty
how is risk measured - Correct answer-in terms of variability of returns
-variance
-standard deviation
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,standard deviation - Correct answer-statistical measure of dispersion of possible
outcomes about expected value. It is square root of weighted average squared
deviation of possible outcomes from expected value
larger the standard deviation - Correct answer-the more variables are an
investment's returns and riskier the investment
what has uncertain payoffs - Correct answer-risky investments
what is expected value - Correct answer-statistical measure of most likely outcome
-statistical measure of mean or average value of possible outcomes. The weighted
average of possible outcomes, with weights being probabilities of occurrence
what is normal distribution - Correct answer-bell shaped curve
z-statistic - Correct answer-an observation's distance from expected value in terms
of standard deviation
*used to find probability of observing data point if distribution is normal
risk and required return - Correct answer-required rate of return can be split into a
risk-free rate and a premium for risk
*as level of risk in an investment increases, required rate of return increases*
four components of a risk premium - Correct answer-1) maturity risk
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, 2) default risk
3) seniority risk
4) marketability risk
maturity risk - Correct answer-impact of interest rate changes during life of
investment
*you plot interest rates yields on vertical axis and length of time to maturity on
horizontal axis*
components of risk premium - Correct answer--yield curve
-expectations theory
-liquidity premium theory
-market segmentation theory
default risk - Correct answer-possibility that interest and principal will not be
repaid as promised
seniority risk - Correct answer-in event of default, which claims are paid first?
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