Financial Risk

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Financial Risk Questions and Answers

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If you were able to invest $32,000 at a rate of 6.40% for 3 months, how much money would you have at the end of that period?
Oriole Company will invest $820,000 today. The investment will earn 7% for 7 years, with no funds withdrawn. In 7 years, the amount in the investment fund is a) $820,000.00 b) $1,318,767.00 c) $1,221,800.00 d) $1,316,740.00.
Discuss the two components that determine the return on investment. The components are (1) dollar income-interest or dividend paid during the holding period and (2) the change in the value of investment.
A corporate treasurer tells you that he has just negotiated a 5-year loan at a competitive fixed rate of interest of 5.2%. The treasurer explains that he achieved the 5.2% rate by borrowing at 6-month LIBOR plus 150 basis points and swapping LIBOR for 3.7
A) What are derivatives? B) How can derivatives be used to reduce risk? C) Can derivatives be used to increase risk? Explain.
Identify the types of firm-specific factors that increase a firm's diversifiable risk (idiosyncratic risk or nonsystematic risk).
Under what circumstances are investors likely to ignore the unsystematic risk characteristics of a security?
Which of the following is not an input needed to calculate the number of stock index futures contracts required to hedge a stock portfolio? a. the value of the stock portfolio b. the beta of the stock portfolio c. the contract value of the index futures c
What are the primary methods that insurance companies can use to reduce their exposure to liquidity risk?
Discuss why you would expect the saving-borrowing pattern to differ by occupation (for example, for a doctor versus a plumber).
1. If the default risk of corporate bonds decreases, what will happen to the demand for corporate bonds, the price of corporate bonds, the demand for treasuries, and the price for treasuries? 2. Also
Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain.
Where should I invest a lump sum amount of Rs. 1 lakhs? I have a home loan running at 8.4%. Should I simply pay off the loan or invest in any other profitable avenue?
Two investment opportunities are as follows: For A: First cost 150, Uniform annual benefit 25, End-of-useful-life salvage value 20, Useful life = 15 years For B: First cost =100, Uniform annul
a. One of the causes of the recent financial crisis in the United States has been excessive risk taking due to underestimation of risk. How does this relate to financial leverage? Can overestimation o
Calculate the EPS & DFL for each financing plan (i.e. 4 calculations). Total funding needed $350,000 Interest rate on debt 6.5% Common stock price per share $15 Plan A Debt 30% Plan B Debt 60% Tax rat
Suppose you are a trader specializing in futures on corn, wheat, oats, barley, and other... 1 answer below Suppose you are a trader specializing in futures on corn, wheat, oats, barley, and other agricultural commodities. From the following list, which r
Characterize each of the investment objectives given below as one of the following: an absolute r... Characterize each of the investment objectives given below as one of the following: an absolute risk objective, a relative risk objective, an absolute ret
The systematic risk principle states that the expected return on a risky asset depends only on which of the following? \\ A. Asset-specific risk \\ B. Diversifiable risk \\ C. Unique risk \\ D. Market risk Choose an option and explain.
Explain whether it is possible to earn excess returns without taking on additional risk.
MULTIPLE CHOICE: Choose the one alternative that best completes the statement or answers the question. Systematic risk: A) cannot be eliminated through diversification. B) is the risk eliminated through diversification. C) represents the risk affectin
Which of the following investments has the greater relative risk? Investment Expected Return Standard Deviation F 16% 7% G 27%13%
An investor believes that a bond may temporarily increase in credit risk. Which of the following would be the most liquid method of exploiting this? a. The purchase of a credit default swap b. The s
Why do companies make investments in other companies? What are the differences between debt and equity investments? What is the experience of either your organization or an organization that you are f
Joi, Inc. stock has an annual return mean and standard deviation of 11% and 32%, respectively. What is the smallest expected loss, in percentages, in the coming month with a probability of 2.5%? (Note
Which of the following is a way to reduce financial risk? a) to only buy stock in a major company b) to only buy bonds in a major company c) to diversify in a variety of assets, both financial and physical d) to diversify in a number of banks.
Pacific Company bought 35% of the outstanding common stock of Atlantic Inc. on January 1, 2014, for $400,000. Atlantic reported net income of $200,000 for 2014 and declared and paid no dividends for the year. This investment was sold for $500,000 on Decem
Clayton Inc. purchased 30% of the outstanding common stock of Austin Industries on January 1, 2014, for $180,000. Austin reported net income of $70,000 for 2014 and declared and paid cash dividends on common stock of $30,000. The amount of Clayton's inve
Dior Manufacturing purchased 100% of Venus, Inc. common stock for $900,000 when Venus had stockholders' equity consisting of $400,000 of common stock and $300,000 of retained earnings. In the consolidated balance sheet, Dior's investment in Venus will be
Of the following which differs from the other three? a) Systematic Risk b) Market Risk c) Asset unique Risk d) Undiversifiable Risk
Selk Steel Co., which began operations on January 4, 2015, had the following subsequent transactions and events in its long-term investments. 2015 Jan.5 Selk purchased 50,000 shares (25% of total) of Kildaire's common stock for $1,600,000. Oct.23 Kildai
When are some factors you should consider before deciding if Netflix (NFLX) stock would be a good investment?
The average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States. Why is this pattern observed?
What is meant by the term return? What is the difference between monetary returns and percentage returns?
Denise purchased mutual fund A and Fred purchased mutual fund B. Fund A has a higher expected return and higher risk as compared to fund B. We can conclude that Denise may be risk-averse, risk-neutral, or risk-preferring whereas Fred must be risk-averse.
What must be the beta of a portfolio with E(rP)=13.40%, if rf=6% and E(rM)=10%? (Round your answer to 2 decimal places.) Explain.
Thomas can invest $10,000 by purchasing a 1-year T-bill for $9,585, or he can place the $10,000 in a 12-month deposit paying 6.22%. Which investment will provide a higher return? In addition to return, what else should Thomas consider when making his inv
The clearing house in a futures exchange helps eliminate: a. the risk of crop failure b. the risk of poor crop prices c. credit risk d. liquidity risk e. inside trading
Can an ordinary person benefit from the historically high rate of return derived from stock ownership without taking excessive risk? Explain.
Please determine whether the following statements about speculation in the market are true or false. - Speculators help to keep prices level and steady - Speculation sometimes leads to lower prices th
The culture-specific approach gives employees a genuine non-appreciation for the culture they are about to encounter. True or false Angel investors help approximately 50,000 companies get off the gr
You are given the following information about an investment account: Over the year, the time-weighted return is 0%, and the dollar-weighted (money-weighted) return is Y. Calculate Y.
Jill has $10,000 to invest at time t = 0, and two possible ways to invest it. Investment A has a force of interest equal to 0.8/(1+0.8t) at time t. Investment B provides a 5% effective annual interes
Bank of Alaska's stock portfolio has a market value of $10 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (am) has been estimated at 1.5%. What is the five-day VAR of this portfolio using adverse rate change
One way to reduce financial risk is to: a. buy bonds only in a major company. b. buy stocks only in a major company. c. diversify in a variety of assets, both financial and physical. d. diversify in a
Discuss the difference between the top-down and bottom-up approaches. What is the major assumption that causes the difference in these two approaches?
Evaluate the implications of new, lower dividend and capital gains rates.
How can we best attract institutional investors? Explain briefly.
Parent Co. invested $1,097,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year. T-account Balance for Investment in Sub Co. 1,097,000 DR 140,200
A total of $50,000 was available for investing in a project to reduce insider theft in an appliance warehouse. Two alternatives identified as Y and Z were under consideration. The overall rate of retu
Oceania is a small open economy. Suppose that a large number of foreign countries begin to subsidize investment by instituting an investment tax credit (while adjusting other taxes to hold their tax r
On January 1, 20X8, Parent Company acquired 90% ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest, at the date of acquisition, was equal to 1
Which of the following best describes investment risk? a) the probability of achieving an improbable event. b) the possibility of making a profit. c) the potential variability in future cash flows.
Grant, Inc. acquired 30% of South Company's common stock for $350,000 on January 1, 2011. During 2011, South Company reported a net income of $120,000 and paid dividends totaling $30,000. For 2012, So
An Unrealized Holding Gain (or Loss) on Investments classified as "available-for-sale" securities: a) Is reported in the asset section of the balance sheet, as an adjustment to the carrying value of
Grant, Inc. (Grant) acquired 30% of South Co.'s (South) voting stock, for $200,000, on January 1, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over Sout
Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date, Devin sold equipment to Pepe, for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,0
War, inflation, and the condition of the foreign markets are all examples of: a. unsystematic risk b. business specific risk c. nondiversifiable risk d. internal risk
Credit default swaps contributed to the crisis in all the following reasons except: a. Financial institutions relied heavily on credit default swaps to protect themselves from default risk. b. Credi
Systemic risk exists because a) financial institutions borrow using long-term debt securities but lend their funds for short-term periods. b) financial institutions invest heavily in Treasury securi
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