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What is the ability to sell an asset quickly at a fair price is associated with?
Liquidity risk
-
What is the variability of operating earnings is associated with?
Business Risk
-
The uncertainty of investment returns associated with how a firm finances its investments is known as?
Financial risk.
-
What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
Shift up and have a steeper slope.
-
A decrease in the market risk premium, all other things constant, will cause the security market line to?
Have a flatter slope.
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What Is An Investment?
A current commitment of $ for a period of time in order to derive future payments.
-
If the future payment will be diminished
in value because of inflation, then the investor will
demand an interest rate higher than the pure
time value of money to also cover the expected
inflation expense?
Inflation.
-
Measures the risk per unit of expected return and is a relative
measure of risk?
Coefficient of Variation (CV)
-
Three Components of Required Return?
- The time value of money during the time period
- The expected rate of inflation during the period
- The risk involved.
-
Uncertainty of income flows caused by the nature
of a firm’s business?
Business Risk
-
Uncertainty caused by the use of debt financing?
Financial Risk
-
How long will it take to convert an investment
into cash?
Liquidity Risk
-
Uncertainty of return is introduced by acquiring
securities denominated in a currency different
from that of the investor?
Exchange Rate Risk
-
Political risk is the uncertainty of returns caused
by the possibility of a major change in the political
or economic environment in a country?
Country Risk.
-
Relates the variance of the investment to the variance of the market?
Systematic risk.
-
Measures this systematic risk of an asset?
Beta.
-
Comprises business risk, financial
risk, liquidity risk, exchange rate risk, and country
risk?
Fundamental risk
-
Refers to the portion of an individual asset’s total variance attributable to the variability of the total market portfolio?
Systematic risk.
-
It shows the relationship between risk and return for all
risky assets in the capital market at a given time?
The Security Market Line (SML)
-
If investors become more risk averse, then the SML will
have a ___________, indicating a higher risk premium, RPi,
for the same risk level?
Steeper slope.
-
A change in the RRFR or the expected rate of
inflation will cause a _______ in the SML?
Parrallel shift.
-
When nominal risk-free rate increases, the SML
will ______ , implying a ______ of return while
still having the same risk premium.
Shift up, higher rate.
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