unit 2: chapter 2
Of the following, reinvestment risk is most closely associated with
call risk
Examples of investments in assets that would be considered illiquid would be all of the following EXCEPT
common stock
Sovereign risk is the risk
that a country will default on its commercial debt obligations
Portfolio diversifying might be used to reduce which of the following risks?
Business risk
When interest rates are falling, which bonds are most likely to expose holders to call risk?
Callable bonds with higher coupons
Which of the following statements regarding systematic risk as it relates to an investment portfolio is TRUE?
Diversification will not eliminate it.
Regarding different types of risk, which of the following is TRUE?
Enactment of, or changes in laws, represent potential legislative risk.
Investors face many different risks. Which of the following would be factors of systematic risk?
I.War II.Global security threats
Which of the following accurately characterizes capital risk?
It can be reduced by diversification.
Which of the following is TRUE regarding currency risk?
It is a nonsystematic risk and, therefore, can be reduced by diversification
By virtue of a stocks listing for trading on a U.S. stock exchange, which of the following risks is reduced or even recognized as eliminated?
Liquidity risk
Which of the following are considered systematic risks—those that would impact all businesses?
Market Risk Inflation Risk
Regarding investment risks, which of the following is TRUE?
Safer investments tend to offer lower yields.
Which of the following statements best describes financial risk?
The risk that an issuer will be unable to meet interest and principal payments on debt obligations
All of the following are examples of legislative risk EXCEPT
an environmental regulation enacted to require certain precautions be taken
A company is about to introduce a new product. While confident in the product's appeal and market, it is still an unknown factor until sales results are viewed later. Investors holding stock in the company are at this time specifically exposed to
business risk
An investor holding a 4.5% callable bond has it called away by the issuer when interest rates fall to 3.5%. This is an example of
call risk, which can lead to reinvestment risk
The risk that all or a significant portion of the sum invested might be lost is known as
capital risk
The risk when investing, where one has the potential to lose all or part of the investment due to circumstances that are unrelated to the issuer's financial strength or well-being, is known as
capital risk
Political risk is more associated with
emerging economies, but could occur even in highly developed ones
An investor who relies heavily on fixed interest payments from long-term (25-30 years) bonds should be most concerned with
inflation risk
he effect of continually rising retail prices on the investment returns of one's portfolio is best described as
inflation risk
Holding a callable bond with call protection is least impactful for the investor when
interest rates are rising
A luxury tax that consumers must pay that is levied on nonessential items of a certain value or more is an example of
legislative risk
For investors, changes made to the tax code by the IRS are known as a form of
legislative risk
The risk that an investor might not be able to sell an investment quickly and at a fair market price is known as
liquidity or marketability risk
All investors and investments are different. Recognizing this, it is TRUE that
no investment should be deemed suitable for every investor
An investor owns a bond purchased several years ago yielding 3%, which at the time was considered a fair return. However, these fixed 3% interest payments have not kept up with the inflation rate. This situation presents the investor with
purchasing power risk
Inflation risk is most closely associated with
purchasing power risk
The Federal Reserve Bank is raising interest rates, this will
push bond prices lower in the open market
An investor holds shares of a manufacturing company where disposal of the by-products produced during the manufacturing process is necessary. The Environmental Protection Agency (EPA) updates the rules applicable to disposing of the product. For the investor, these changes present a form of
regulatory risk
Those holding the securities of a company where rules might change that impact or upset the way the company does business are exposed to
regulatory risk
An investor has a bond maturing during a time when interest rates are falling. It is likely that the investor, wanting to keep the funds invested, would be most concerned with
reinvestment risk
Purchased 15 years ago with a coupon of 6.25%, a corporate bond in an investor's portfolio has matured. With interest rates now substantially lower at 2.75%, this investor, having no immediate need for the proceeds, is now exposed to
reinvestment risk
The ratings on the debt instruments of a foreign country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as
sovereign risk
There are several types of investment risks that will generally fall into 2 categories. These categories are known as
systematic and nonsystematic
The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances is known as
systematic risk
