Statement 1: Risk management tools decreases the volatility of the firm’s cash flow. Statement 2: Commodity prices are potentially affected largely by the landscape of laws and politics. Only statement 1 is true Only statement 2 is true Both statements are true
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Statement 1: Risk management tools decreases the volatility of the firm’s cash flow.
Statement 2: Commodity prices are potentially affected largely by the landscape of laws and politics.
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- Which of the statements about the Arbitrage Pricing Theory MUST BE TRUE. I. There is only one systematic risk, the market risk. II. The market risk factor must be one of many systematic risk factors. III. Individual assets may have a positive or negative alpha A. I only B. II only C. III only D. None of the aboveMarket risk ________. a. is equal to the rate of return generated by a risk-free asset b. cannot be eliminated, as it is non-diversifiable c. is synonymous with diversifiable risk d. is synonymous with financial riskQUESTION Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?
- 1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is not a common factor used in this approach? Market capitalization O Unexpected changes in real GDP O Unexpected changes in inflation Yield curve shifts Consumer confidence19. The slope of the SML is determined by the value of market risk premium. a. True b. False The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions. 20. a. True b. False
- B- False 6. Active strategy is an investment policy that based on the premise that securities are fairly priced, and it avoids the costs involved in undertaking security analysis A- True. B- False 7. Examples of the company-specific influences are firm's success in R&D, its management style and philosophy, and so on. A- True B- False 8. Some examples of macroeconomics variable that cause market risk are business cycles, inflation, interest rates, exchange rates, and so forth. A- Truc B- FalseIn theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are thereasons for the focus on stand-alone risk?Unsystematic risk is * a.the risk associated with movements in securities prices B.higher when interest rates rise C.the risk of loss of purchasing power D.reduced through diversification
- 2. Stock prices and stand-alone risk Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investment's possible returns, occurs when there is uncertainty about an investment's future outcome, such as the return expected to be generated by the investment and realized by an investor. Generally, investors would prefer to invest in assets that have: O A higher-than-average expected rate of return given the perceived risk O A lower-than-average expected rate of return given the perceived risk Read the following descriptions and identify the type of risk or term being described: Description This type of risk relates to the possibility that a firm will not be able to service its…Relying solely on using a traditional spot cash market is a relatively high risk means to pricing a commodity. A. True B. FalseWhich of the following statements are true about systematic risk? Select one or more: a. Beta is a measure of systematic risk in ALL asset pricing models b. Systematic risk can be fully eliminated by diversification С. Systematic risk can be traded among financial entities but cannot be destroyed or eliminated d. All stocks must have the same exposure/factor loading on systematic risk e. Systematic risk is priced f. The premia on systematic risk must always be higher than the risk-free rate Which statements are true of optimization? Select one or more: a. It is a general mathematical tool and can be used not only in portfolio optimization but many business problems b. When applied in real world setting we often use computers to estimate the optimum numerically rather than doing calculus by hand с. One of the earliest applications of optimization to business problems is Augustin Cournot's 1838 duopoly pricing model d. Optimization can only ever be as effective as the description of the…