MaxMark_Ch06_Questions_Only

MaxMark_Ch06_Questions_Only - MenuItem 6: (Topic 6)...

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MenuItem 6: (Topic 6) Investors in the share market Question 1: The risks faced by investors in shares can be divided into two categories: systematic risk and unsystematic risk. Which of the following is a source of systematic risk? A: changes in the interest rate on 10-year bonds B: variations in productivity at a company’s main factory C: changes in the cost of specialised labour D: changes in the effectiveness of a company’s managers Feedback: Changes in interest rates will affect the market as a whole and are, therefore, a source of systematic risk. The factors mentioned in B and D would only affect returns for an individual company; while, for C the effects would be confined to a small number of companies, so B, C and D are all sources of unsystematic risk. More: Financial Institutions, Instruments and Markets 5/e , Section 6.1, p. 249. Within the context of investing in shares listed on a stock exchange, risk can be categorised as (1) systematic, and (2) unsystematic. Systematic risks are those risk exposures that will have an impact on share prices generally in the market. The majority of shares listed on a particular stock exchange will be affected to a lesser or greater degree. The impact may be positive or negative. Examples of systematic risk exposures include: changes in interest rates changes in exchange rates contraction or expansion in economic activity introduction of new legislation political stability changes in market confidence and perception. Question 2: The risks faced by investors in shares can be divided into two categories: systematic risk and unsystematic risk. Which of the following is a source of unsystematic risk? A: an increase in the company tax rate B: a change in the value of the Australian dollar C: replacement of a company’s chief executive D: the occurrence of a widespread drought Feedback: Replacement of a chief executive is a company-specific event and is, therefore, a source of unsystematic risk. The factors listed in A, B and D would have market-wide effects. More: Financial Institutions, Instruments and Markets 5/e , Section 6.1, p. 249. On the other hand, unsystematic risk affects a single corporation or a small group of companies. Examples of unsystematic risk exposures that will have an impact on a corporation include: the resignation of an executive manager a change in future performance forecasts the failure of technology or communication systems dissent within the board of directors rumour or evidence of financial difficulty. Question 3: Liquidity in a stockmarket is important to investors because if a market is liquid: A: there are many listed securities to choose from MaxMark t/a Financial Institutions, Instruments and Markets 5e by Viney 1
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B: the securities listed are less risky than unlisted investments C: investors can generally buy or sell shares at the current market price D: brokerage costs are low Feedback: A market is regarded as liquid if there are many buyers and sellers present in the market. Under these circumstances a large order to buy or sell can be executed with little or no effect on the
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This note was uploaded on 03/18/2012 for the course FIN 2009 taught by Professor Mr.mark during the Spring '12 term at Hanoi University of Technology.

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MaxMark_Ch06_Questions_Only - MenuItem 6: (Topic 6)...

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