Question

There are a number of characteristics that make securities desirable to investors. This includes negotiability which reflects the ability to transfer the security from one holder to another, and liquidity which enables securities to be easily sold when required. The third characteristic that affects the attractiveness of securities is their risk. Which of the following is least likely to be one of the three major categories of risk that affect the attractiveness of securities?

	a.	Capital value risk: which is the risk of a capital gain or loss on the security.
	b.	Exchange rate risk: which is the risk arising from fluctuations in the value of a base currency against a foreign currency.
	c.	Default risk: which is the risk that the issuer fails to meet the commitments made in the security.
	d.	Inflation risk: which is the risk that the real value of the return on the security will be eroded by inflation.
	e.	None of the answers are correct.

Answer 1

Option D is Correct

Inflation risk: which is the risk that the real value of the return on the security will be eroded by inflation.

Reason being it least affect the attractiveness is the rate of interest at which securities are presented in the market to the buyers are already set to the level at which it helps beat inflation for the buyer and as soon as the security holder belives that inflation rate could go up he/she can get rid of that security immediately, whereas Capital Value Risk, Exchange Rate Risk and Default Risk are the major risk factors which affects the attractiveness of any security.

hence Options A, B, C and E are INCORRECT.