1. Risk that affects at most a small number of companies is called _____ risk.
portfolio
undiversifiable
market
firm-specific
total
2. 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
3. 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
4. Market risk is measured by:
the mean.
beta.
the geometric average.
the standard deviation.
the arithmetic average.
5. 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.
6. 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.