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FRM FRM Quiz on TOPIC 2, created by f.yafai on 26/10/2013.

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TOPIC 2

TOPIC 2

Question 1 of 7

1

Which of the following would be the BEST motivator for outsourcing information technology (IT) systems?

Select one of the following:

  • Internal IT resources are stretched

  • IT is regarded as a core strategic need

  • There is high risk of compromising confidentiality of information held on the IT system.

  • There is high risk of the cost of systems maintenance compromising other business objectives.

Explanation

Question 2 of 7

1

Reducing risk without any impact on business cash flows is most likely to

Select one of the following:

  • Decrease investors' required rate of return

  • Decrease the Enterprise Value

  • Decrease the PV of expected future business cash flows

  • Increase the cost of capital

Explanation

Question 3 of 7

1

Under CAPM, diversifiable risk: ( two answers )

Select one or more of the following:

  • Is also referred to as systematic risk. (systematic risk: affect all sectors)

  • Is a sector-specific but NOT firm-specific

  • Is unavoidable for most businesses

  • Affects share prices

Explanation

Question 4 of 7

1

Which of the following statements is true?

Select one of the following:

  • Risk seeking investors expect a positive correlation between risk and expected return.

  • Risk is an inevitable result of being in business

  • Minimising all risk should be a key objective for all firms

Explanation

Question 5 of 7

1

For a retail company, the possible loss of sales due to heavy snow forecast next week is best described as:

Select one of the following:

  • Risk

  • Volatility

  • Uncertainty

  • Pre-transactio exposure

Explanation

Question 6 of 7

1

Lower borrowing interest costs will usually be achieved by:

Select one of the following:

  • Increasing gearing

  • Accepting restrictive loan covenants

  • Bootstrapping

  • Actively pursuing riskier business rather than higher return

  • Making a special dividend payment

Explanation

Question 7 of 7

1

The average risk free interest is 2%. The FTSE world index returned minus1% last year, and similar poor equity returns are forecast for the coming year. Over the longer term, it is expected that the market risk premium will be 6%.
A company has a beta of one. Under CAPM, the company's cost of equity is?

Select one of the following:

  • Minus 1%

  • 1%

  • 3%

  • 3.5%

  • 8%

Explanation

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