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1.
The risk of the company in which you invest being destroyed by a passing tornado is an example of _______ risk.
Unsystematic. A tornado is a natural disaster that is unlikely to affect all industries; hence, it is an unsystematic risk.
2.
A fall in price of one security in a diversified portfolio may be offset by an increase in price of another.
True. Problems in one industry may lead people to seek the products or services of another in your portfolio.
3.
How does having a lot of money affect your risk tolerance?
It can enable you to afford loss. If you have a lot of money, you can afford to lose some, and so your risk tolerance will increase.
4.
You have invested in a portfolio that has only two stocks. You observe that every time one stock goes up in price, the other goes down. The two stocks are _______ correlated.
Negatively. Investments with prices that move opposite to each other are correlated negatively.
5.
For a given investment return, there are optimal mixes of stocks, bonds, and cash that produce different returns with a minimum of risk.
True. These portfolios are called "efficient." Their optimality has been demonstrated by analyzing returns over history.
6.
Diversifying your stock portfolio among different companies or _______ can reduce risks that are specific to a company.
Industries. Sometimes, a problem that hits one company in an industry can hit others in that industry.
7.
Diversification helps to reduce risk because _______.
Different investments perform differently. The idea behind diversification is that the changes in differently performing investments will cancel each other out.