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Question 1 of 10
1. Question
Which of the following are the types of unsystematic risk?
I. Business Risk
II. Regulatory Risk
III. Political Risk
IV. Liquidity Risk
Correct
The four most common types of unsystematic risk are:
• Business Risk
• Regulatory Risk
• Political Risk
• Liquidity RiskIncorrect
The four most common types of unsystematic risk are:
• Business Risk
• Regulatory Risk
• Political Risk
• Liquidity Risk -
Question 2 of 10
2. Question
Which is not an example of Unsystematic risk?
Correct
Examples of unsystematic risk include, but are not limited to, natural disasters, poor management of a firm, a product shortage due to poor logistics, et cetera. Investors may diversify against the risk of a hurricane hurting their investment in an offshore oil company by also investing funds allocated to the energy sector in an oil company that operates in the plains.
Incorrect
Examples of unsystematic risk include, but are not limited to, natural disasters, poor management of a firm, a product shortage due to poor logistics, et cetera. Investors may diversify against the risk of a hurricane hurting their investment in an offshore oil company by also investing funds allocated to the energy sector in an oil company that operates in the plains.
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Question 3 of 10
3. Question
How can you define Business risk?
Correct
Simply put, business risk is the risk that a business in which the investor has invested will fail. Businesses fail for many reasons, from bad management to natural disasters, and are even more prone to failure during economic recessions. When a business fails, its assets are usually liquidated to meet its outstanding obligations. After creditors are paid, the investors in the firm get what is left.
Incorrect
Simply put, business risk is the risk that a business in which the investor has invested will fail. Businesses fail for many reasons, from bad management to natural disasters, and are even more prone to failure during economic recessions. When a business fails, its assets are usually liquidated to meet its outstanding obligations. After creditors are paid, the investors in the firm get what is left.
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Question 4 of 10
4. Question
What is the alternative name for sovereign risk?
Correct
Political risk, also called sovereign risk, is the risk that investors will lose money due to the political climate of the country in which their investment is located.
Incorrect
Political risk, also called sovereign risk, is the risk that investors will lose money due to the political climate of the country in which their investment is located.
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Question 5 of 10
5. Question
What are the features of Capital structure?
I. It refers to the way in which a firm has chosen to finance its operations.
II. This structure is a mix of debt issues and equity issues.
III. Capital structure is often analyzed using the debt-to-equity ratio.
IV. Capital structure is often analyzed using the valuation ratio.
Correct
Capital structure refers to the way in which a firm has chosen to finance its operations. This structure is a mix of debt issues and equity issues. Capital structure is often analyzed using the debt-to-equity ratio. The more debt a company uses to finance its operations, the riskier the company is, but this can also lead to higher returns for investors, as the firm may use debt to invest in ventures in which it may not otherwise have had access.
Incorrect
Capital structure refers to the way in which a firm has chosen to finance its operations. This structure is a mix of debt issues and equity issues. Capital structure is often analyzed using the debt-to-equity ratio. The more debt a company uses to finance its operations, the riskier the company is, but this can also lead to higher returns for investors, as the firm may use debt to invest in ventures in which it may not otherwise have had access.
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Question 6 of 10
6. Question
What is not true regarding Discounted cash flows?
I. It is used to valuate any security by discounting future cash flows and assigning the investment a present value.
II. Using discounted cash flows to value equities can be problematic, since cash flows from equities tend to be uncertain.
III. The discounted cash flows method of valuation is particularly useful, however, when attempting to value securities from the fixed-income sector.
IV. The drawback to using the discounted cash flows method is that the discount rate may be inaccurate in times of volatile rates of inflation.
Correct
Discounted cash flow is used to valuate any security by discounting future cash flows (usually using inflation as the discount rate) and assigning the investment a present value. Using discounted cash flows to value equities can be problematic, since cash flows from equities tend to be uncertain. The discounted cash flows method of valuation is particularly useful, however, when attempting to value securities from the fixed-income sector. Since the par value of the investment is known, and the coupon of the fixed security is constant, the resulting present value calculation often provides relevant and predictable results. The drawback to using the discounted cash flows method is that the discount rate may be inaccurate in times of volatile rates of inflation.
Incorrect
Discounted cash flow is used to valuate any security by discounting future cash flows (usually using inflation as the discount rate) and assigning the investment a present value. Using discounted cash flows to value equities can be problematic, since cash flows from equities tend to be uncertain. The discounted cash flows method of valuation is particularly useful, however, when attempting to value securities from the fixed-income sector. Since the par value of the investment is known, and the coupon of the fixed security is constant, the resulting present value calculation often provides relevant and predictable results. The drawback to using the discounted cash flows method is that the discount rate may be inaccurate in times of volatile rates of inflation.
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Question 7 of 10
7. Question
What are the features of Pooled investments?
I. They are funds to which more than one investor contributes funds for the purpose of holding them as a group.
II. They also create economies of scale which in turn lower an individual’s administrative costs and allow for greater diversification and benefit from professional money managers.
III. They also spread the risk over the pool of investors.
IV. The major drawback to pooled investments is related to the large pool of investors in regard to capital gains.
Correct
Pooled investments, such as unit investment trusts (UITs) and mutual funds are funds to which more than one investor contributes funds for the purpose of holding them as a group. This is done so each of the investors may have access to benefits to which they may not have had access individually. Pooled investments also create economies of scale which in turn lower an individual’s administrative costs (such as trading costs) and allow for greater diversification and benefit from professional money managers. Pooled investments also spread the risk over the pool of investors. The major drawback to pooled investments is related to the large pool of investors in regard to capital gains. The capital gains earned on the pooled funds are spread evenly over the pool, regardless of the tenure of the participant.
Incorrect
Pooled investments, such as unit investment trusts (UITs) and mutual funds are funds to which more than one investor contributes funds for the purpose of holding them as a group. This is done so each of the investors may have access to benefits to which they may not have had access individually. Pooled investments also create economies of scale which in turn lower an individual’s administrative costs (such as trading costs) and allow for greater diversification and benefit from professional money managers. Pooled investments also spread the risk over the pool of investors. The major drawback to pooled investments is related to the large pool of investors in regard to capital gains. The capital gains earned on the pooled funds are spread evenly over the pool, regardless of the tenure of the participant.
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Question 8 of 10
8. Question
What are the most basic types of options?
I. Calls
II. Puts
III. Shots
IV. Covered Call
Correct
Options contracts are contracts between two or more investors based on the right or requirement to buy or sell a certain security that underlies the contract. The most basic types of options are calls and puts.
Incorrect
Options contracts are contracts between two or more investors based on the right or requirement to buy or sell a certain security that underlies the contract. The most basic types of options are calls and puts.
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Question 9 of 10
9. Question
What are the features of Futures?
I. Futures are contracts between two or more parties that require the purchaser to buy a commodity in the future at a fixed price.
II. Futures differ from forward contracts in that forward contracts are based on the current price with future delivery.
III. Some futures may be settled in cash, and others are settled when the commodities are delivered.
IV. A futures contract derives its value from the underlying commodity or financial instrument, hence it is considered to be a derivative security.
Correct
Futures are contracts between two or more parties that require the purchaser to buy a commodity (or occasionally a financial instrument) in the future at a fixed price, and vice versa for the seller of the future. Futures differ from forward contracts in that forward contracts are based on the current price with future delivery. Some futures may be settled in cash, and others are settled when the commodities are delivered. Since a futures contract derives its value from the underlying commodity or financial instrument, it is considered to be a derivative security. Futures have multiple uses to investors. Some may use them speculatively (futures may be highly leveraged compared to equity markets) to bet that the price of a given commodity will be volatile, while others may use them to lock in a price and hedge against uncertainty.
Incorrect
Futures are contracts between two or more parties that require the purchaser to buy a commodity (or occasionally a financial instrument) in the future at a fixed price, and vice versa for the seller of the future. Futures differ from forward contracts in that forward contracts are based on the current price with future delivery. Some futures may be settled in cash, and others are settled when the commodities are delivered. Since a futures contract derives its value from the underlying commodity or financial instrument, it is considered to be a derivative security. Futures have multiple uses to investors. Some may use them speculatively (futures may be highly leveraged compared to equity markets) to bet that the price of a given commodity will be volatile, while others may use them to lock in a price and hedge against uncertainty.
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Question 10 of 10
10. Question
What is not true regarding Forward contracts?
Correct
Forward contracts are contracts between two or more parties based on an underlying asset, usually a commodity. The contract obligates the buyer to pay the current price of the asset for delivery in the future, and obligates the seller to deliver the asset in the future regardless of the change in price. Forward contracts differ from futures in that futures contracts are settled in the future at the future price, where forward contracts are settled at current prices. The fact that the value of the forward contract is derived from the underlying asset makes it a derivative. Investors can use forward contracts to hedge against risk. If the future price of an asset is uncertain and the asset is not needed until the future, a forward contract can help eliminate the uncertainty of the future price.
Incorrect
Forward contracts are contracts between two or more parties based on an underlying asset, usually a commodity. The contract obligates the buyer to pay the current price of the asset for delivery in the future, and obligates the seller to deliver the asset in the future regardless of the change in price. Forward contracts differ from futures in that futures contracts are settled in the future at the future price, where forward contracts are settled at current prices. The fact that the value of the forward contract is derived from the underlying asset makes it a derivative. Investors can use forward contracts to hedge against risk. If the future price of an asset is uncertain and the asset is not needed until the future, a forward contract can help eliminate the uncertainty of the future price.