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Flashcards from PDF
Flashcards from PDF
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1
Question
What does variance measure in the context of investment returns?
Answer
Dispersion of expected returns, indicating risk level
2
Question
How does larger variance affect an investment's uncertainty?
Answer
Increases dispersion of returns, heightening risk
3
Question
What are the three components of a required return?
Answer
Time value of money, expected inflation, risk premium
4
Question
What assumptions define the real risk-free rate?
Answer
No inflation, certain cash flows
5
Question
What influences the real risk-free rate?
Answer
Investment opportunities in the economy
6
Question
How is the cost of funds determined at any time?
Answer
Price equating supply and demand for capital
7
Question
What causes business risk in a firm?
Answer
Uncertainty in income flows from business nature
8
Question
What does liquidity risk measure for an investment?
Answer
Time required to convert to cash
9
Question
What introduces financial risk to a firm?
Answer
Uncertainty from debt financing
10
Question
What is the source of exchange rate risk?
Answer
Uncertainty in returns from currency fluctuations
11
Question
What political factor creates country risk?
Answer
Major changes in economic or political environment
12
Question
How does systematic risk relate to the market?
Answer
Variance of investment tied to market variance
13
Question
What cannot be diversified away in investments?
Answer
Systematic risk components like inflation
14
Question
What characterizes unsystematic risk?
Answer
Due to asset's unique features
15
Question
Why are investors not compensated for unsystematic risk?
Answer
It can be eliminated through diversification
16
Question
What does the Security Market Line (SML) represent?
Answer
Risk-return combinations for risky assets
17
Question
How do investors use the SML for decisions?
Answer
Select investments matching risk preferences
18
Question
What can cause changes in positions on the SML?
Answer
Perceived changes in investment risk
19
Question
What are key characteristics of a good market?
Answer
Timely information, liquidity, low costs, rapid price adjustment
20
Question
How does liquidity contribute to market quality?
Answer
Through marketability and depth
21
Question
What reduces transaction costs in markets?
Answer
Low costs to reach market and brokerage fees
22
Question
Why do prices adjust rapidly in efficient markets?
Answer
Response to new information arrival
23
Question
What benefit does decimal pricing provide?
Answer
Reduces price variation and spreads, lowering costs
24
Question
Where are new securities initially sold?
Answer
In primary markets
25
Question
What distinguishes Treasury bills from notes and bonds?
Answer
Original maturity of 1 year or less
26
Question
How are new municipal bonds typically sold?
Answer
Via competitive bid or negotiated sales
27
Question
What is a private placement in bond issuance?
Answer
Direct sale to small group of investors
28
Question
How are corporate bonds usually sold?
Answer
Through negotiated arrangement with investment bankers
29
Question
What defines a seasoned equity issue?
Answer
New shares by firms with existing stock
30
Question
What makes an IPO unique compared to seasoned issues?
Answer
First public sale, no prior market exists