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Survey of Finance Exam

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50 MC questions
Chapter 7, 8, and 9 Test review * Risk * It’s the possibility of a loss, the uncertainty of a return that will never be achieved * What are the two components of risk? * Unsystematic risk (diversifiable risk) * Business risk * Financial risk * Can be eliminated through diversification * Systematic risk (non diversifiable risk) * Market risk * Interest rate risk * Reinvestment risk * Purchasing power risk * How are they measured? * (portfolio risk) Total risk= diversifiable + non-diversifiable * Standard deviation measures total risk * Beta coefficient measures systematic risk (Non-diversifiable risk) * High beta, high risk * Which component can be reduced (diversified away)? How? * Diversifiable risk * Eliminates unsystematic risk and reduces total risk * Correlation and the ranges between -1 and 1 * Systematic risk is reduced through portfolio diversification * Distinguish expected returns, realized returns, and required returns. * Expected return- an estimate on your return, incentive for accepting risk * Realized return- * Required return- return necessary to induce an individual to make an investment * What is risk premium? * refers to the amount by which an asset's expected rate of return exceeds the risk-free interest rate. * What are the two sources of returns? * Capital gain * Flows of income (dividends) * * What are the three major financial statements? What do they tell you? * Cash flow * Operating activities * Investment activities * Financing activities * Income statement * Financial statement that summarizes the revenue and expense for a certain

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