1. Firm-specific risk: can be effectively eliminated through portfolio diversifi

Question

1.
Firm-specific risk:

can be effectively eliminated through portfolio diversification.

is compensated for by the risk premium.

is measured by beta.

cannot be avoided if you wish to participate in the financial markets.

is related to the overall economy.

2.
________ is a measure of total risk, whereas ________ is a measure of market risk.

Standard deviation; beta

Beta; standard deviation

Standard deviation; variance

Coefficient of variation; standard deviation

None of the above is correct.

3.
Total risk can be divided into:

standard deviation and variance.

standard deviation and covariance.

portfolio risk and beta.

market risk and firm-specific risk.

portfolio risk and covariance.

4.
Which one of the following is an example of market risk?

the price of lumber declines sharply

airline pilots go on strike

the Federal Reserve increases interest rates

a hurricane hits a tourist destination

people become diet conscious and avoid fast food restaurants

5.

Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.

total

6.
Which one of the following is an example of firm-specific risk?

the inflation rate increases unexpectedly

the federal government lowers income taxes

an oil tanker runs aground and spills its cargo

interest rates decline by one percent

the GDP rises by 2% more than anticipated

Explanation / Answer

1.

Firm-specific risk:

can be effectively eliminated through portfolio diversification

2. standard deviation is a measure of total risk, whereas Beta is a measure of market risk.

3. market risk and firm-specific risk.

4. the Federal Reserve increases interest rates

5. Systematic risk

6. an oil tanker runs aground and spills its cargo

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