IFA IFA Business Finance & Investment 2

Question 1

What is the difference between systematic and unsystematic risk?

Accepted Answer

Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is company-specific and can be diversified

Answer

Systematic risk is unique to a company; unsystematic risk affects all companies

Answer

Systematic risk is always higher than unsystematic risk

Answer

There is no practical difference in portfolio management

Question 2

What does portfolio diversification achieve for an investor?

Accepted Answer

Reduces unsystematic risk by combining assets whose returns are not perfectly correlated

Answer

Guarantees a minimum return

Answer

Eliminates all investment risk

Answer

Maximizes return by concentrating in the best-performing asset

Question 3

What is a rights issue in corporate finance?

Accepted Answer

An offer of new shares to existing shareholders in proportion to their current holdings

Answer

The legal right of management to veto shareholder decisions

Answer

A share buyback program

Answer

A dividend paid in additional shares

Question 4

What does the term 'cost of debt' refer to in capital structure analysis?

Accepted Answer

The effective after-tax interest rate the company pays on its borrowings

Answer

The total loan balance owed by the company

Answer

The bank fees charged for setting up a loan

Answer

The market price of outstanding bonds

Question 5

What is the capital asset pricing model (CAPM) used for?

Accepted Answer

Estimating the expected return on an investment based on its systematic risk (beta)

Answer

Calculating depreciation on fixed assets

Answer

Valuing inventory under FIFO or LIFO

Answer

Forecasting future sales revenue

Question 6

Which capital budgeting technique accounts for the time value of money?

Accepted Answer

Net present value (NPV)

Answer

Payback period

Answer

Accounting rate of return (ARR)

Answer

Return on investment (ROI) based on average profits