Question

1A. Which of the following is not a type of financial cash flows?

1. Interest expenses on commercial papers
2. Capital raised from a private firm’s initial public offering (IPO)
3. Larger bonus payments to the senior executives due to an elevated share price
4. Cash spent on share repurchases in the secondary stock markets

1B. What type of risk matters to an investor with a well-diversified portfolio? How is this type of risk measured?

1. Systematic risk; beta
2. Unique risk; standard deviation
3. Idiosyncratic risk; beta
4. Total risk; standard deviation

Answer 1

1.

Interest Expenses on commercial paper is not the part of the type of financial cash flow.

As commercial paper is the unsecured and debt instrument issued by the corporation, mostly for financing the accounts payable and inventories or meeting the short term liabilities. The maturity of the commercial paper range longer than the 270 days. These commercial paper is generally issued at the discount fro the face value and reflects the prevailing market interest rates.

other options in the question are the type of the financial cash flow.

2.

Systematic Risk matters to the investors with a well diversified portfolio.

Systematic risk is the volatile risk that affects many industries, stocks, and assets in the market. Systematic risk affects the overall market and it is difficult to predict or make an assumption. Similar with the unsystematic risk diversification cannot take place for smooth running of the systematic risk, as it affects the wide range of assets and securities. For eg. Great Recession was a form of systematic risk which downturn and affect the economy and the whole market.

Beta is measured for a stock volatility in relation to the market. Beta helps tp measure the exposure of the risk at a particular stock or sector which has a relation into the market, and helps the investors to know the risk of the investment portfolio by calculating it.

• A beta of 0 indicates that the portfolio is uncorrelated with the market.
• A beta less than 0 indicates that it moves in the opposite direction of the market.
• A beta between 0 and 1 signifies that it moves in the same direction as the market, with less volatility.
• A beta of 1 indicates that the portfolio will move in the same direction, have the same volatility and is sensitive to systematic risk.
• A beta greater than 1 indicates that the portfolio will move in the same direction as the market, with a higher magnitude, and is very sensitive to systematic risk.

Assume that the beta of an investor's portfolio is 2 in relation to a broad market index, such as the S&P 400. If the market increases by 3%, then the portfolio will generally increase by 6%. Likewise, if the market decreases by 3%, the portfolio generally decreases by 6%. This portfolio is sensitive to systematic risk, but the risk can be reduced by using hedging.