ASSIGNMENT SW#1 MOD3 RETURN & RISK

Multiple Choice
A 1. Source of return arising from an increase of an investment’s value or price
a Capital gain
.
b Capital loss
.
c Dividend
.
d Interest
.
B 2. Source of return arising from a decrease of an investment’s value or price
a Capital gain
.
b Capital loss
.
c Dividend
.
d Interest
.
A 3. This risk is caused by variations in operating income over time because of changes in unit sales, price,
cost margin and/or fixed expenses.
a Business risk
.
b Exchange rate risk
.
c Purchasing power risk
.
d Interest rate risk
.
C 4. This risk occurs when inflation increases over costs and can hurt the firm’s profitability if it cannot raise
prices to compensate for the increased expenses.
a Business risk
.
b Financial risk
.
c Purchasing power risk
.
d Interest rate risk
.
D 5. This risk occurs when changes in cost of borrowing are usually not related to changes in the firm’s sales
or operating profits but rather to variations in the level of interest rates in the economy.
a Business risk
.
b Exchange rate risk
.
c Purchasing power risk
.
d Interest rate risk
.
B 6. This risk affects domestic companies that have a lot of foreign related transactions or whose raw material
requirements are imported from abroad.
a Business risk
.
b Exchange rate risk
.
c Purchasing power risk
.
d Financial risk
.

B 7. Any combination of financial assets or investments is called a

a basket of goods b portfolio c non-current asset d current
. . . . acquisition

B 8. This occurs when we invest in several different assets rather than just a single one.
a Portfolio correlation
.
b Diversification
.
c Deviations
.
d Variations
.
D 9. Risk that cannot be eliminated through diversifications.
a Business risk
.
b Financial risk
.
c Micro risk
.
d Market or systematic risk
.
C 10. Which of the following is not systematic risks (macro-economic risks)?
a Interest rate risk
.
b Exchange rate risk
.
c Liquidity risk
.
d Inflation risk
.
A 11. Which of the following statements is/are true concerning risk:
I. Diversifications cannot eliminate risk that is inherent in the macro economy.
II. Total risk of an asset has two components: firm-specific risk and systematic or market risk.
a Only statement I is true
.
b Only statement II is true
 .
c Both statements are true
.
d Neither I nor II is true
.
B 12. Which of the following statements is not correct?
a The Philippine Stock Exchange (PSE) is the only stock exchange operating in the
. Philippines.
b Systematic risks (market risks or macro-economic risks) are risks that can be diversified
. away.
c The change in price, or value of an investment is called capital gain if the value of the
. asset rises.
d Since it is difficult to forecast efficient markets, we should spread our funds across
. several investments.
A 13. The risk that securities cannot be sold at a reasonable price on short notice is called
a Liquidity risk
.
b Interest-rate risk
.
c Purchasing-power risk
.
d Default risk
.
C 14. An asset with high risk will have a(n)
a low expected return
.
b lower price than an asset with low risk
.
c increasing expected losses
.
d high standard deviation of returns
.
D 15. Computed as a periodic returns minus the average returns
a variance
.
b deviations
.
c standard deviations
.
d coefficient of variation
.
A 16. Derived by summing the squared deviations and dividing by n-1
a variance
.
b deviations
.
c coefficient of variation
.
d standard deviations
 .
C 17. The square root of the variance
a variance
.
b deviations
.
c standard deviations
.
d coefficient of variation
.
C 18. Measures the risk per unit of return
a variance
.
b deviations
.
c standard deviation
.
d coefficient of variation
.
C 19. Variations in income before taxes over time because fixed interest expenses do not change where
operating income rises or falls
a exchange rate risk
.
b purchasing power risk
.
c financial risk
.
d business risk
.
B 20. The labor unions at PLDT declared a strike over unfair management practices. This is an example of
a systematic risk
.
b unsystematic risk
.
c market risk
.
d tax risk
.
B 21. Return received on a periodic basis such as interest, dividends, or rent:
a current income
.
b capital gains
.
c holding period return
.
d all of the above
.
C 22. Refers to the total return carried from holding an investment for that period of time:
a current income c holding period return
 . .
b capital gains d all of the above
. .

C 23. The following are risks the financial managers should consider except:
a business risk
.
b liquidity risk
.
c default risk
.
d all of the above
.
A 24. The risk that the business enterprise will have general business problems depending on changes in
demand input, prices, and technological obsolesces:
a business risk
.
b liquidity risk
.
c default risk
.
d all of the above
.
D 25. The risk that an investment may be sold at high discount:
a business risk
.
b liquidity risk
.
c default risk
.
d purchasing power risk
.
C 26. The risk that the issuing business enterprise is unable to make interest payments or principal repayments
on debt:
a business risk
.
b liquidity risk
.
c default risk
.
d inflation risk
.
C 27. Market risk is:
a risk associated with changes in share price resting from broad swings in share capital
. market as a whole.
b risk associated with fluctuations in the value of an asset as the interest rates and
. conditions of the money supply and capital market change.
c risk associated with the possibility that you will receive lesser amount of purchasing
. power than was originally invested.
 d none of the above
.
D 28. Diversification is described as:
a an answer to reduction in risk
.
b means not putting all eggs in one basket
.
c a protection against fluctuations
.
d all of the above
.
B 29. All called the compounded annual rate of return, it is a measure of return for multiple-period situations:
a arithmetic return
.
b geometric return
.
c both arithmetic and geometric return
.
d all of the above
.
A 30. It is a measure of return of a security’s return over time to that of the overall market.
a BETA
.
b geometric return
.
c arithmetic return
.
d overall return
.