Question

17. The type of risk that is associated with the specific operations of the firm is referred to as:

A. systematic risk

B. non diversifiable risk

C. financial risk

D. business risk

E. both C and D

18. A very risk averse individual would most likely choose a stock with a beta coefficient of:

A. equal to 1

B. greater than 1

C. greater than 2

D. equal to 2

E. less than 1

Answer 1

Answer17 -C. Financial risk

Financial risk specifically looks into the company's ability of using financial leverage, debt financing and generate sufficient cash flow to cover interest payments on financing and other debt-related obligations. A company with a relatively higher level of debt financing is expected to have a higher level of risk. It evaluates the specific risk that are related to the financial aspects of a firm and works kn that. All the other options are either a classification of risk or are not associated to specific operations of a firm. Therefore, financial risk is the correct answer.

Answer 18 - E. Less than 1

Beta coefficient tells us how volatile, i.e., how frequently it can change, a stock's price is compared to all.the stock's prices in general. A beta coefficient more than 1, indicates higher returns with high level of risk. Whereas, beta coefficient less than 1 gives lower returns with low risks. A risk averse individual always chooses a less risky venture, no matter if the return is low. Therefore, a risk averse individual will most likely choose a stock of beta coefficient less than 1, and thus correct answer is the last option.