Define investment risk.
The potential for loss or lower-than-expected returns on an investment.
True or false: Diversification reduces investment risk.
TRUE
Diversification spreads risk across various assets, minimizing the impact of any single loss.
Fill in the blank: Market risk is also known as _______ risk.
Systematic
What is liquidity risk?
The risk of not being able to sell an asset quickly without a significant price reduction.
Define credit risk.
The risk that a borrower will default on a loan or obligation.
True or false: Inflation risk affects the purchasing power of returns.
TRUE
Inflation can erode the real value of investment returns over time.
What does volatility refer to in investments?
The degree of variation of trading prices over time.
Fill in the blank: Risk tolerance is an investor’s ability to _______.
Withstand losses
What is the risk-return tradeoff?
The principle that potential return rises with an increase in risk.
Define systematic risk.
Risk inherent to the entire market or market segment.
True or false: Unsystematic risk can be eliminated through diversification.
TRUE
Unsystematic risk is specific to a company or industry.
What is interest rate risk?
The risk that changes in interest rates will affect investment values.
Fill in the blank: Geopolitical risk arises from _______.
Political instability or conflict
Define behavioral finance.
The study of how psychological influences affect investor behavior.
What is capital risk?
The risk of losing the original investment amount.
True or false: Asset allocation is a strategy to manage risk.
TRUE
Asset allocation involves distributing investments among different asset categories.
Fill in the blank: Hedging is used to _______ risk.
Offset
What is currency risk?
The risk of loss due to fluctuations in exchange rates.
Define risk management.
The process of identifying, assessing, and prioritizing risks.
What does alpha measure in investments?
The excess return of an investment relative to the return of a benchmark index.
True or false: Beta measures an asset’s volatility compared to the market.
TRUE
A beta greater than 1 indicates higher volatility than the market.
Fill in the blank: Sharpe ratio measures risk-adjusted _______.
Return
What is drawdown?
The peak-to-trough decline during a specific period for an investment.
Define risk-adjusted return.
A measure of return that considers the risk taken to achieve it.
