Financial Management - Study Mode

[#1151] If risk can be eliminated with help of diversification, then relevant risk is
Correct Answer

(A) smaller than stand-alone risk

Explanation

Solution: If risk can be eliminated with help of diversification, then relevant risk is smaller than stand-alone risk. Standalone risk measures the dangers associated with a single facet of a company's operations or by holding a specific asset, such as a closely-held corporations. In portfolio management, standalone risk measures the undiversified risk of an individual asset. Relevant risk is the fluctuation of returns caused by the macroeconomic factors that affect all risky assets.

[#1152] Treasury yielded by bond is 7% and market required return is 13% then market risk premium will be
Correct Answer

(C) 6.00%

Explanation

Solution: Market risk premium = Market required return - Treasury yielded by bond = 13% - 7% = 6%

[#1153] Chance of occurrence of any event is classified as
Correct Answer

(A) probability

Explanation

Solution: Chance of occurrence of any event is classified as probability. The probability of an event is a number describing the chance that the event will happen.

[#1154] According to market risk premium, an amount of risk premium depends upon investor
Correct Answer

(B) risk aversion

Explanation

Solution: According to market risk premium, an amount of risk premium depends upon investor risk aversion. The term risk-averse refers to investors who, when faced with two investments with a similar expected return, prefer the lower-risk option.

[#1155] When changes in patents and industry competition occur, required rate of return
Correct Answer

(B) does not change

Explanation

Solution: When changes in patents and industry competition occur, required rate of return does not change. The required rate of return is the minimum return an investor expects to achieve by investing in a project. An investor typically sets the required rate of return by adding a risk premium to the interest percentage that could be gained by investing excess funds in a risk-free investment.