Which of the following represent undiversifiable risks? I. The Federal Reserve raises interest rates. II. A product is recalled because of safety problems. III. The economy slips into a recession. IV. The CEO 's divorce settlement forces him to sell off half of his stock holdings.
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Which of the following represent undiversifiable risks? I. The Federal Reserve raises interest rates. II. A product is recalled because of safety problems. III. The economy slips into a recession. IV. The CEO 's divorce settlement forces him to sell off half of his stock holdings.
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- Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike feel emotionally neutral since the dollar value of the gain in his stock portfolio exactly offsets the amount of extra taxes he has to pay? Explain.Which of the following represent diversifiable risks? the president of a company suddenly resigns the economy goes into a recessionary period a company's product is recalled for defects the Federal Reserve unexpectedly changes interest rates Group of answer choices 2 and 4 only 1, 2, and 3 only 1, 2, and 4 only 1, 2, 3, and 4 1 and 3 onlyClassify the following events as mostly systematic or mostly unsystematic. Is the distinction clear inevery case? Provide detailed explanation. a. Short-term interest rates increase unexpectedly.b. The interest rate a company pays on its short-term debt borrowing is increased by its bank.c. Oil prices unexpectedly decline.d. A manufacturer loses a multimillion-dollar product liability suit.
- You read a news story blaming the central bank for pushing the economy into recession. The article goes on to mention that not only has output fallen below its potential level, but that inflation has also risen. If you were to respond defending the central bank, what argument would you make? Explain in detail.What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?Ray loses his job as a result of a corporate downsizing. Consequently, he falls behind on the mortgage payments on his personal residence. His friend Ted would like to make the delinquent mortgage payments for him. a. Could the payments be structured so that Ray can deduct the mortgage interest? b. Could the payment arrangement deny both Ray and Ted a mortgage interest deduction? c. Could the payments be structured so that Ted can deduct the mortgage interest?
- Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy in light of a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital will improve free cash flow. Historically, RR has done little to examine working capital, mainly because of poor communication among business functions. In the past, the production manager resisted Johnson’s efforts to question his holdings of raw materials, the marketing manager resisted questions about finished goods, the sales staff resisted questions about credit policy (which affects accounts receivable), and the treasurer did not want to talk about the cash and securities balances. However, with the recent credit scare, this resistance has become unacceptable and Johnson has undertaken a company-wide examination of cash, marketable securities, inventory, and accounts receivable levels. Johnson also knows that decisions about working capital cannot be made in a vacuum. For example, if inventories could be lowered without adversely affecting operations, then less capital would be required, and free cash flow would increase. However, lower raw materials inventories might lead to production slowdowns and higher costs, and lower finished goods inventories might lead to stockouts and loss of sales. So, before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables. Johnson has begun her investigation by collecting the ratios shown here. (The partial cash budget shown after the ratios is used later in this mini case.) Johnson plans to use the preceding ratios as the starting point for discussions with RR’s operating team. Based on the data, does RR seem to be following a relaxed, moderate, or restricted current asset usage policy?Both the stock market and and unemployment insurance provide volatile payments that depend on factors like the state of the economy or whether you lose your job. But there is the fundamental difference between the returns you receive from the stock market and the ones you receive from the unemployment insurance. Which is the difference? [Hint: think of the timing when you receive the big payment]34) Dollery established that Franchesco: plans to retire from her job in 20 years, after which this portfolio will be her primary source of income. has sufficient cash available so that she will not need this portfolio to generate cash outflows until she retires. opposes certain policies of the government of her home country and does not wish to own any securities of companies that do business with its regime. To complete the assessment of Franchesco's investment constraints, Dollery still needs to inquire about Franchesco's: Select one or more: liquidity needs time horizon unique needs tax concerns
- Bruce buys $9,000 of Sketchy Corporation stock. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the stock price falls by 62%. What is the percentage increase now required for the value of Bruce's stock to get back to what he paid for it?Lois selects securities to invest in after carefully examining the fundamentals of a company, using the accounting statements in its annual reports. Peter seeks to earn abnormal returns solely by studying stock price charts and investing based on the patterns he finds in the past prices. Which one of the following statements is correct?a. If Lois earns abnormal returns this violates weak-form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency.b. If Lois earns abnormal returns this violates strong-form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency.c. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peterearns abnormal returns this violates strong-form market efficiency.d. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peterearns abnormal returns this violates weak-form market efficiency.e. If Peter and Lois both earn abnormal…Jill Davis tells her broker that she does not want to sell her stocks that are below the price she paid for them. She believes that if she just holds on to them a little longer they will recover, at which time she will sell them. Which behavioral characteristic is the basis for Davis’s decision making?a. Loss aversion.b. Conservatism.c. Representativeness.
