Financial Management - Study Mode

[#861] The volume of sales is influenced by ____ of a firm.
Correct Answer

(B) credit policy

Explanation

Solution: The volume of sales is influenced by credit policy of a firm. Credit policy is an important part of the overall strategy of a firm to market its products. It refers to those decision variables that influence the amount of trade credit i.e investment in receivables.

[#862] Company specific risk is also known as ________.
Correct Answer

(D) Idiosyncratic risk

Explanation

Solution: Idiosyncratic risk, also known as unsystematic risk or residual risk or diversifiable risk, is risk that is not correlated to overall market risk – it is the risk of price change caused by the unique circumstances of a particular security, or the risk that is sector-specific or company-specific.

[#863] An estimation by marginal investor, a higher expected return is earned on
Correct Answer

(A) more risky securities

Explanation

Solution: An estimation by marginal investor, a higher expected return is earned on more risky securities. The marginal investor in a firm is the investor who is most likely to be trading at the margin and therefore has the most influence on the pricing of its equity.

[#864] Term structure premium, an inflation of bond and bond default premium are included in
Correct Answer

(A) risk factors

Explanation

Solution: Term structure premium, an inflation of bond and bond default premium are included in risk factors. Term Premium is the amount by which the yield-to-maturity of a long-term bond exceeds that of a short-term bond. Because one collects coupons on a long-term bond for a longer period of time, its yield-to-maturity will be more. The amount of a term premium depends on the interest rates of the individual bonds. Inflation-linked bonds, or ILBs, are securities designed to help protect investors from inflation. A default premium is the additional amount a borrower must pay to compensate a lender for assuming default risk. All companies or borrowers indirectly pay a default premium, through the rate at which they must repay the obligation.

[#865] Mostly in financials, risk of portfolio is smaller than that of assets
Correct Answer

(B) weighted average

Explanation

Solution: Mostly in financial, risk of portfolio is smaller than that of assets is weighted average. One of the most basic principles of finance is that diversification leads to a reduction in risk unless there is a perfect correlation between the returns on the portfolio investments. Owing to the diversification benefits, standard deviation of a portfolio of investments (stocks, projects, etc.) should be lower than the weighted average of the standard deviations of the individual investments.