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4. Types of Risk Measuring Risk Risk Introduction to Risk and Return > Risk Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_79&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. Financial risk is associated to the chances that an investor might lose value in an investment. It is separated into different sources of decline. Often the risks interact with each other and ultimately shock causes panic. Many of the worst market crashes have been a result of widespread speculation and not the devaluation of that asset itself. In the market crash of 2008, investors feared that some home owners would default. It triggered a chain of events that shocked the whole world and left many people in bad financial situations. Types of Risk Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/risk-79/types-of-risk-347- 3890?campaign_content=book_192_section_79&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess View on Boundless.com Introduction to Risk and Return > Risk

6. The general progression in the risk-return spectrum is: short-term debt, long-term debt, property, high-yield debt, and equity. When a firm makes a capital budgeting decision, they will wish, as a bare minimum, to recover enough to pay the increased cost of goods due to inflation. Risk aversion is a concept based on the behavior of firms and investors while exposed to uncertainty to attempt to reduce that uncertainty. Beta is a measure firms can use in order to determine an investment's return sensitivity in relation to overall market risk. Measuring Risk Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/risk-79/measuring-risk-348- 1865?campaign_content=book_192_section_79&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Inflation View on Boundless.com Introduction to Risk and Return > Risk

7. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

8. Key terms inflation An increase in the general level of prices or in the cost of living. systematic risk The risk associated with an asset that is correlated with the risk of asset markets generally, often measured as its beta. Variable Rate Mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return

9. Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Inflation." Public domain http://commons.wikimedia.org/wiki/File%253AInflation.png View on Boundless.comPublic domainhttp://commons.wikimedia.org/wiki/File%253AInflation.pngView on Boundless.com Introduction to Risk and Return

10. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return A company issues a bond with the provision that it may pay off the debt early. This bond is subject to which type of risk? A) Model risk. B) Interest rate risk. C) All of the above. D) Prepayment risk.

11. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return A company issues a bond with the provision that it may pay off the debt early. This bond is subject to which type of risk? A) Model risk. B) Interest rate risk. C) All of the above. D) Prepayment risk.

12. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return A relatively new tech company issues a bond that is publicly traded. The company is based in the US and pays interest in dollars. The potential investor lives in the UK. Which of the following risks does the investor face if he buys the bond? A) Market risk. B) Foreign investment risk. C) All of these answers. D) Credit risk.

13. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return A relatively new tech company issues a bond that is publicly traded. The company is based in the US and pays interest in dollars. The potential investor lives in the UK. Which of the following risks does the investor face if he buys the bond? A) Market risk. B) Foreign investment risk. C) All of these answers. D) Credit risk.

14. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return Using the Value at Risk methodology, an investment advisor says that she is 90% sure that her investment portfolio will not lose more than $250,000 in a given day. Based on that description, which of the following statements is true? A) It is 90% sure that the portfolio will not earn more than $250,000 in a given day. B) Investors should expect to see losses 1 out of every 10 days. C) The portfolio will lose more than $250,000 every month. D) All of these answers.

15. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return Using the Value at Risk methodology, an investment advisor says that she is 90% sure that her investment portfolio will not lose more than $250,000 in a given day. Based on that description, which of the following statements is true? A) It is 90% sure that the portfolio will not earn more than $250,000 in a given day. B) Investors should expect to see losses 1 out of every 10 days. C) The portfolio will lose more than $250,000 every month. D) All of these answers.

16. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return A portfolio has a 95% certainty that it won't lose more than $50,000 in a given day. On the big loss days, there is a 30% chance the portfolio will lose $50,000 and a 70% chance it will lose $75,000. What is the portfolio's expected shortfall? A) ES_0.05 = $57,500 B) ES_0.05 = $67,500 C) ES_0.95 = $67,500 D) ES_0.95 =$57,500

17. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return A portfolio has a 95% certainty that it won't lose more than $50,000 in a given day. On the big loss days, there is a 30% chance the portfolio will lose $50,000 and a 70% chance it will lose $75,000. What is the portfolio's expected shortfall? A) ES_0.05 = $57,500 B) ES_0.05 = $67,500 C) ES_0.95 = $67,500 D) ES_0.95 =$57,500

18. Attribution Wikibooks. "Real Estate Financing and Investing/Understanding Return and Risk." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Real_Estate_Financing_and_Investing/Understanding_Return_and_Risk#Risk_and_the_Risk- Return_Trade_OffCC BY-SA 3.0 http://en.wikibooks.org/wiki/Real_Estate_Financing_and_Investing/Understanding_Return_and_Risk#Risk_and_the_Risk- Return_Trade_Off Wikipedia. "Beta (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Beta_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Beta_(finance) Wikipedia. "Interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/InterestCC BY-SA 3.0http://en.wikipedia.org/wiki/Interest Wikipedia. "Risk aversion." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk_aversionCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk_aversion Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflationCC BY-SA 3.0http://en.wiktionary.org/wiki/inflation Wiktionary. "systematic risk." CC BY-SA 3.0 http://en.wiktionary.org/wiki/systematic+riskCC BY-SA 3.0http://en.wiktionary.org/wiki/systematic+risk Wikipedia. "Risk-return spectrum." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk-return_spectrumCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk-return_spectrum Wikipedia. "Stock market crash." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Stock_market_crashCC BY-SA 3.0http://en.wikipedia.org/wiki/Stock_market_crash Wikipedia. "Financial risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_riskCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_risk Wikipedia. "Variable Rate Mortgage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Variable%20Rate%20MortgageCC BY-SA 3.0http://en.wikipedia.org/wiki/Variable%20Rate%20Mortgage Wikipedia. "Expected shortfall." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Expected_shortfallCC BY-SA 3.0http://en.wikipedia.org/wiki/Expected_shortfall Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return