ch 14

Question 1

systematic risk

Answer 1

• the risk in the returns return os an investment that is associated with the macroeconomic factors that affect all risky assets
• nondiversifable risk
• risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company’s circumstances
• market risk, interest rate risk, inflation risk

Question 2

market risk

Answer 2

• type of systematic risk
• when the market goes down, so do securities
• measured by security’s beta

Question 3

interest rate risk

Answer 3

• type of systematic risk
• if Fed changes interest rates all bonds/fixed income instruments will be affected
• risk that a security’s value will decline because of a rise in interest rates
• common shares of public utility companies would so be effected bc of
  
  • liberal dividend policies
  • highly levered
    -reduce through laddering (bonds purchased at the same time but mature at different times

Question 4

reinvestment risk

Answer 4

• might be unable to reinvestment at the same rate as previously

Question 5

inflation risk

Answer 5

• purchasing power risk
• inflation reduces buying power
• fixed income investments are most vulnerable
• TIPS are designed to protect against inflation risk

Question 6

nonsystematic (unsystematic) risk

Answer 6

• can be reduced by diversification
• risks that are specific to industries, business enterprise
• business, financial, liquidity, political, regulatory risks

Question 7

business risk

Answer 7

• an operating risk, generally caused by poor management decisions
• highest risk for investors whose portfolios contain stock in only one issuer or lower rated bonds

Question 8

financial risk

Answer 8

• companies that use debt financing (leverage)
• inability to meet debt obligations
• credit risk or default risk

Question 9

regulatory risk

Answer 9

• sudden change in regulatory climate

Question 10

legislative risk

Answer 10

• results from changes to laws (like changes to take code)

Question 11

political risk

Answer 11

• potential instability

Question 12

sovereign risk

Answer 12

• risk of country defaulting on its commercial debt obligations

Question 13

liquidity risk

Answer 13

• risk that when an investor wishes to dispose of an investment no one will be willing to buy it or that a large purchase/sale wouldn’t be possible at the current price
• marketability risk

Question 14

currency or exchange rate risk

Answer 14

• risk of currency fluctuations impacting the value of your investment

Question 15

control relationships

Answer 15

• conflicts of interest
• when a broker dealer is owned by, is under common ownership with, or owns an entity that issues securities

Question 16

regulation full disclosure (FD)

Answer 16

• SEC rule
• issuers must disclose info that can affect stock prices
• prompt disclosure (next trading day)
• public conference calls, press releases/conferences, webcasts are FD compliant
• Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company’s material disclosures at the same time.

Question 17

tender offers

Answer 17

• one company attempts to takeover another by acquiring voting shares
• need shareholder approval
• requires adequate disclosure to clients
• tender is at a premium
• there is a time limit
• must remain open unless withdrawn for at least 20 business days from the date the offer is announcement
• if terms of offer change, revised offer must remain open for at least 20 days from commencement and 10 business dat from the date the terms are changed
• target company within 10 business days must provide shareholders: acceptance/rejection of the offer, no opinion on the offer, unable to take a position on the offer

Question 18

short tendering

Answer 18

• prohibited
• shareholders can only tender shares they own

Question 19

partial tender

Answer 19

• less than 100% of the outstanding shares
• holders of convertible securities can tender without converting, only must convert if the tender is accepted

Question 20

SEC rule 10b-18

Answer 20

• issuer buying back its own stock in the open market
• transaction cannot affect the opening or closing
• transactions can be executed at prices no higher than the highest independent bid or last reported sale

Question 21

senior exploitation

Answer 21

• wrongful unauthorized taking, withholding, appropriation of securities
• any act or omission, including power of attorney
• prevent by
  
  • clear procedures
  • plan for how personnel handles
  • training
  • preemptive action
  • keep with with regulations

Question 22

soft dollars

Answer 22

• allocating money to pay for research
• must be disclosed but falls under safe harbor
• . Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees.

Question 23

safe harbor

Answer 23

• method of behavior that avoids running afoul of the law

Question 24

rehypothecate

Answer 24

In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer’s account.