ECON 2035 Study Guide - Midterm Guide: Idiosyncrasy, Nominal Interest Rate, Market Risk

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5 Feb 2019

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Sum of the value of a person"s assets minus the value of their liabilities. Return expected on an asset during a future period. The degree of uncertainty in the return on an asset. Loving- investors prefer to hold risky assets with the possibility of maximizing returns. Chose the asset with lower risk when they have the same expected return, resulting in tradeoffs between risk and return. Neutral- investors make decisions on the basis of expected returns, ignoring risk. Risk that is common to all assets of a certain type. Ex; changes in stock returns as a result of the business cycle. Risk that pertains to a particular asset (or firm) rather than to the market as a whole. List the 6 factors that shift bond demand. List the 4 factors that shift bond supply. Expected pre-tax profitability of physical capital investment. Relationship/distinctions between idiosyncratic risk vs. market risk.

Related Questions

Why do CDs have lower rates of return than stocks?

CDs are much riskier investments than stocks.

CDs are less risky than stocks.

CDs are not taxed while stock s returns are taxable.

CDs are not as liquid as stocks.

Given that most investors tend to be risk averse,

	no one buys risky assets.
	there's a trade-off between risk and return.
	low risk assets provide the best return.
	it must be a superior strategy compared to one that is risk loving.

Which of the following financial assets has both the highest risk and highest return for the period of 1926-2009?

	small company stocks
	large company stocks
	corporate bonds
	Treasury bills

Since all assets typically do not move together, how can investors typically reduce risk?

	purchase only the best performing assets
	diversify one's portfolio across different asset classes
	avoid poor performing assets
	actively manage one's portfolio

Risk that is common to all assets (e.g., common stocks) of a certain type is referred to as

	systematic risk.
	unsystematic risk.
	idiosyncratic risk.
	structural risk.

Which is the best example of idiosyncratic risk?

	a financial crisis
	a lawsuit because the corporation produced a faulty product
	a recession
	rising interest rates

If market participants rely only past stock prices to forecast future stock prices,

	they will be better able to forecast future price increases than future price decreases.
	they will be better able to forecast future price decreases than future price increases.
	they have adaptive expectations.
	they have rational expectations.

True, false, or uncertain. (5 points each) Your grade will be based solely on your explanation.

1. Risk in economics and finance is the possibility of loss, which implies that standard deviation is an incorrect measure of risk.

2. On stock exchanges in the United States, there is only one type of order that can be placed: a market order.

3. If the efficient markets theory of stock prices is correct, technical analysis of stock prices is useless.

4. Bubbles are hard to predict.

5. According to the Capital Asset Pricing Model, the beta of a stock is the risk premium for holding a stock.

6. Internal rate of return is a better guide to choosing investments than present value.

7. A leveraged investment is riskier.

8. If Firm A has a higher beta than Firm B, then Firm A has a higher systematic risk than Firm B.

9. If firm C has a lower beta than Firm D, then Firm C has lower unsystematic (idiosyncratic) risk than Firm D.

10. A stock that is a 'castle in the air' has a high expected return after its price has risen.

11. The net present value of a firm to shareholders is the present value of all revenue received by the firm.

12. The internal rate of return is the discount rate that results in the NPV being positive.

greyarmadillo845

Risk that is common to all assets (e.g., common stocks) of a certain type is referred to as

	systematic risk.
	unsystematic risk.
	idiosyncratic risk.
	structural risk.

In an efficient market with rational expectations, the actual price of an asset

Question 28 options:

	will equal its expected price.
	will often be below its expected price.
	will often be above its expected price.
	equals its expected price plus a random error term.

The efficient markets hypothesis

	assumes that market participants form their expectations adaptively.
	applies rational expectations to the pricing of assets.
	applies to the stock market, but not to the bond market.
	indicates that the stock market is efficient, but not rational.

In recent decades, the United States

	was essentially a closed economy.
	was generally a net borrower of foreign funds.
	was generally a net lender abroad.
	experienced a net outflow of savings.

Ms. Smith has 45% of her money in the stock of Green Corp. and the remainder of her money in Blue Corp. Based on historical data, the standard deviation for Green Corp. stock is 30% and the standard deviation for Blue Corp. is 15%. Security analysts estimate the correlation between Green and Blue as 0.55. What is the standard deviation of Ms. Smith's portfolio?

	0.112
	0.175
	0.037
	0.193

An open economy is one that

	has a large government sector.
	lends and borrows in the international capital market.
	produces mainly agricultural goods.
	produces mainly manufactured goods.

The world real interest rate is

	set annually by a special commission at the United Nations.
	set annually by a special commission at the International Monetary Fund.
	determined in the international capital market.
	determined daily on the New York Stock Exchange.

A small open economy

	is unable to affect the world real interest rate by its borrowing and lending decisions.
	will always be a net borrower from abroad.
	will always be a net lender abroad.
	is almost never able to borrow abroad.

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ECON 2035 Study Guide - Midterm Guide: Idiosyncrasy, Nominal Interest Rate, Market Risk

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