Homework Answers
- A. Risk that the founder or CEO retires is a risk that is related to a specific firm only which can be avoided by not investing in a single firm, rather investing in multiples firm to reduce risk. Therefore, this is a diversifiable, firm specific risk. It is also known as unsystematic risk.
- B. Rising of oil prices will increase production cost. This is something that can not be avoided by diversifying investment. This is a systematic risk.
- C. A faculty product design is a kind of firm specific risk. This can be avoided by diversifying the portfolio to the other firms.
- D. Slow down in the economy will lead to reduction in demand which is a macro economics problem and diversification can not mitigate such risk at all. Therefore, this is a kind of systematic risk.
Risk Premium: It is the excess return over the risk free return which investor expects for having excess risk. The risk premium is consists of basically business specific, exchange rate, country specific, liquidity risk and financial risk of a firm.
In the above four cases, in case of 1 and 3, investor will expect higher risk premium.
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Which of the following risks of a stock are likely to be firm-specific, diversifiable risks, and...
18. Identify each of the following risks as either systematic risk or diversifiable risk: a. The...
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identify each of the following risks as most likely to be systematic risk or diversifiable risk: a. The risk that your main production plant is shut down due to a tornado. b. The risk that the economy slows, decreasing demand for your firm's products.
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15) Which of the following is/are examples of systematic risk? A) The risk that oil prices...
15) Which of the following is/are examples of systematic risk? A) The risk that oil prices rise, B) The risk that the Federal Reserve raises interes 0) The risk that the economy slows, reducing demand for your firm's products D) All of the above E) None of the above increasing production costs
Which of the following statements concerning risk are correct? I. Non diversifiable risk is measured by...
Which of the following statements concerning risk are correct? I. Non diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non diversifiable risk. IV.Diversifiable risks are market risks you cannot avoid. O I and III only. O II and IV only. O land Il only. O III and IV only. O I, II, and III only.
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