CAPITAL MARKET QUIZ 5 & 6 (LONG-TEST 1)

1. Which term is used to represent the possibility of not achieving the expected returns on an investment?

• risk

• prosperity

• reliability

• assurance

Why is the risk-free rate commonly used as a benchmark?

• to determine the risk level of an investment

• to calculate the current market value of an investment

• to evaluate the performance of other investment

• to assess the tax implications of an investment

Which component of CAPM represents the extra return expected from the market above a risk-free investment?

• market risk premium

• dividend yield

• stock volatility

• book value per share

What type of risk is primarily associated with internal factors within a company or industry, and is unrelated to market movements?

• liquidity risk

• systematic risk

• credit risk

• unsystematic risk

How do the risk-return profiles of stocks and bonds typically differ?

 

• stocks and bonds have identical risk-return profiles, as both are influenced by market conditions in the same way and typically yield similar returns over time.

• stocks generally offer higher potential returns but come with greater risk compared to bonds, which typically provide lower returns with more stability

• while stocks are considered safer investments, they usually yield lower returns than bonds, which are known for their high volatility and potential for significant price fluctuations.

• bonds are riskier than stocks and therefore provide higher returns to compensate for that risk.

Compare the impact of systematic risk on different assets such as stocks and bonds.

• systematic risk affects bonds more than stocks due to their fixed income nature.

• systematic risk has no impact on bonds, only on stocks

• systematic risk affects both stocks and bonds, but stocks are generally more sensitive to changes in systematic risk.

• systematic risk affects stocks more than bonds due to their lower volatility.

Refers to the risk inherent in the whole market or part of the market

• systematic risk

• credit risk

• unsystematic risk

• liquidity risk

The theory emphasizes the importance of diversifying investments to reduce the overall risk of the portfolio.

• risk tolerance

• rebalancing

• asset correlation

• diversification

Adjusting the portfolio to maintain the desired risk-return profile over time.

• asset selection

• periodic rebalancing

• allocation modeling

• diversification

A diversified portfolio can potentially generate higher long-term returns by capturing growth in different sectors.

• volatility management

• risk reduction

• improved returns

• asset selection