Question

Question1: TRUE OR FALSE

1. The risk premium offered by an asset is determined solely by its specific risk?

2.All other things being equal, a risk-free rate increase increases the value of the call option?

3. Private companies (i.e., not publicly traded) are affected by systematic risk as well as company-specific risk?

4. Market efficiency is due in large part to strong competition among investors?

Answer 1

1. The risk premium offered by an asset is determined solely by its specific risk?

False. Market risk is a macro economical event that affects most everything going on project wise.  The systematic risk can be caused by politics as well.  Beta can measure the investments of the systematic riskto the overall market.The only way to get out of market risk is to hedge out of it, by offsetting an investment

2. All other things being equal, a risk-free rate increase increases the value of the call option?

True. This is because the hedging strategy will comprise the same amount of the underlying asset but a smaller cash loan, since the latter will accrue interest faster.

3. Private companies (i.e., not publicly traded) are affected by systematic risk as well as company-specific risk?

True. Systematic risk refers to the risk due to general market factors and affects the entire industry. It cannot be diversified away. Unsystematic risk, or specific risk is the risk specific to a company that arises due to the company specific characteristics.

4. Market efficiency is due in large part to strong competition among investors?

True. Competition between investors will tend to produce an efficient market—that is, a market in which prices rapidly reflect new information and investors have difficulty making consistently superior returns.