BEC B1 M5 Exam Questions & Answers 2024/2025
What is Risk Averse? - ANSWERSbehavior describes an individual who demand more return on an investment as risk increases. These managers expect to be compensated for increased risk
What is Risk Seeking? - ANSWERSDescribes an individual who seek r...
What is Risk Averse? - ANSWERSbehavior describes an individual who demand more return on an
investment as risk increases. These managers expect to be compensated for increased risk
What is Risk Seeking? - ANSWERSDescribes an individual who seek reduced return for higher risk
What is Risk indifferent behavior? - ANSWERS- describes an individual who is neutral with regard to the
return associated with a particular investment.
- Typically the amount of a risk free rate of return associated with an investment of a given amount
compared to a higher return associated with higher risk is viewed as having equal value
How is risk reduced in investment portfolio? - ANSWERSDiversification
It is important to be able to classify risk into 2 broad categories? - ANSWERSDUNS
(D) diversifiable risk
(U) unsystematic risk (nonmarket/firm-specific)
(N) non-diversifiable risk
(S) systematic risk (market)
What is Market/Systematic/Non-diversifiable risk? - ANSWERSexposure of a security or firm to
fluctuations in value as a result of operating within an economy
Unsystematic/firm-specific/diversifiable risk? - ANSWERSrepresents the portion of a firm's or industry's
risk that is associated with random causes and can be eliminated through diversification
, What type of risk can be reduced by diversification? - ANSWERSlabor strikes
- diversifiable risk, sometimes called unsystematic or firm specific risk can be mitigated by allocation of a
portfolio of investments amongst various firms
What factor is inherent in a firm's operations if it utilizes only equity financing? - ANSWERSBusiness risk
- represents the risk associated with the unique circumstances of a particular company, as they might
affect the shareholder value of that company.
- if an entity purely uses its own cumulative earnings in capitalizing its operations, it is exposed to the
risks of its own unique circumstances.
What is Short-term financing options? - ANSWERS- increased interest rate risk
result in lower interest rates but higher interest rate risks because rates will fluctuate more dramatically
for short-term issues than long-term issues
What is Long-term financing options? - ANSWERS- decreased credit risk
credit risk will decrease because the company will seek refinancing less frequently and thereby have less
credit risk or opportunity that the rates associated with debt will be changed unfavorably or that
financing will be denied altogether
What risk adjustments are used to compute the required rate of return? - ANSWERS1) Default risk
premium (DRP)
- appropriate risk adjustment to the risk-free rate of return and is the additional compensation
demanded by lenders for bearing the risk that the issuer of the security will fail to pay interest or fail to
repay the principal
2) Maturity risk premium (MRP)
- an appropriate risk adjustment to the risk-free rate of return and is the compensation investors
demand for bearing risk. Risk increases with the term to maturity
3) Purchasing power risk premium (IP - inflation premium)
- risk adjustment to the risk free rate of return and is the compensation investors require to bear the risk
that price levels may change and affect asset values or the purchasing power of invested dollar
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