1. Market risk is the chance that a totally unexpected event will have a significant effect on the value of the firm or a specific investment. Answer: FALSE 2. Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall. Answer: FALSE 3. If a person's required return does not change when risk increases, that person is said to be
D) risk-aware. 4. If a person's required return decreases for an increase in risk, that person is said to be
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19. The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset. On the other hand, a portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components. Answer: TRUE 20. The risk of a portfolio containing international stocks generally contains less nondiversifiable risk than one that contains only American stocks. Answer: TRUE 21. The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks. Answer: FALSE 22. Diversified investors should be concerned solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk. Answer: TRUE 23. Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio. Answer: TRUE 24. Systematic risk is that portion of an asset's risk that is attributable to firm-specific, random causes.
Answer: FALSE 25. Unsystematic risk can be eliminated through diversification. Answer: TRUE 26. Unsystematic risk is the relevant portion of an asset's risk attributable to market factors