Question

1. John has his portfolio invested in a diversified mutual fund portfolio. Recently, his portfolio (which is up 9% per year annually for the past 10 years), has dropped almost 15%. What type of risk is John’s portfolio exposed to?

   		Idiosyncratic Risk
   		Behavioral Risk
   		Systematic Risk
   		Industry Risk

2. Lenny, after studying the income statement & cash flow statement of four technology companies, decides that his best option for the long term is T Mobile stock. What type of analysis did Lenny engage in?

   		Fundamental Analysis
   		Technical Analysis
   		Behavioral Analysis
   		None of these

Answer 1

Question 1:

✓ Answer: Systematic risk.

Systematic risk simply means that which affects to the whole market or we can say whole economy as well as it is not easy to predict about such an event due to which over all value of the security will decline. It can not be avoided.

Idiosyncratic risk refers to risk to the individual securities or a group of same type of security while John has invested in mutual fund and in mutual fund investment is done on the different types of securities which belongs to different industries. Behaviour risk refers to the risk due to conscious or unconscious behaviour and in mutual fund portfolio is not managed by John so behaviour risk is not the reason behind the reduction of portfolio. Industry risk refers to the risk which affects to particular industry, while it is given that John has invested in diversified mutual fund and securities in mutual fund belongs to the different industries.

✓Question 2:

Answer: Fundamental analysis

Fundamental analysis refers to take decision after proper analysis of the financial statements and through this statement try to find out intrinsic value of the assets. And in this it is given that Lanny took decision after studying the profit and loss analysis, cash flow statement.So it can be said that she has done fundamental analysis.

Technical analysis refers to take decision on the basis of the past market data of price and volume. So if a person took decision after analysis market data of price and volume than it can be considered as a technical analysis. Behavioural analysis refers to take decision after the analysis of the behaviour of the investors or the behavior of the professionals who are managing portfolios.