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AAMS Module 2: Risk and Return Concepts, Exams of Manufacturing Systems Design

Walden UniversityManufacturing Systems Design

Definitions and explanations of key concepts related to risk and return in finance, including systematic risk, unsystematic risk, beta, capm, and correlation coefficient. It also covers investment strategies like dollar cost averaging and value averaging. Useful for understanding the basics of risk management and investment analysis.

Typology: Exams

2024/2025

Available from 11/10/2024

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2024/2025
AAMS Module 2
Total Risk Answer: Comprised of Systematic Risk & Unsystematic Risk
Standard deviation Answer: Variability of an investment's returns around its
average, or mean, return. Measures total risk (both systematic and unsystematic
risk)
Beta Answer: Measures volatility, systematic risk, and relative risk
Systematic Risk Answer: Also called non diversifiable risk. Includes purchasing
power risk, reinvestment risk, interest rate risk, market risk, and exchange rate
risk
Purchasing power (inflation) risk Answer: Risk of one's purchasing power
decreasing as a result of inflation
Reinvestment risk Answer: Risk that market interest rates have decreased at
the time payments from an investment received. Investor is forced to reinvest his
or her payment amount at a time when rates are not as favorable as they may
have been previously.
Market Risk Answer: Stems from factors independent of any particular
security. Includes political events, broad economic and social changes, and the
mood of the investing public.
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2024/

AAMS Module 2

Total Risk Answer: Comprised of Systematic Risk & Unsystematic Risk Standard deviation Answer: Variability of an investment's returns around its average, or mean, return. Measures total risk (both systematic and unsystematic risk) Beta Answer: Measures volatility, systematic risk, and relative risk Systematic Risk Answer: Also called non diversifiable risk. Includes purchasing power risk, reinvestment risk, interest rate risk, market risk, and exchange rate risk Purchasing power (inflation) risk Answer: Risk of one's purchasing power decreasing as a result of inflation Reinvestment risk Answer: Risk that market interest rates have decreased at the time payments from an investment received. Investor is forced to reinvest his or her payment amount at a time when rates are not as favorable as they may have been previously. Market Risk Answer: Stems from factors independent of any particular security. Includes political events, broad economic and social changes, and the mood of the investing public.

2024/ Exchange rate risk Answer: Risk of having both their principal and return diminished by changes in the relative values of US and foreign currencies. Unsystematic Risk Answer: Risk directly associated with particular securities and risk involved can be reduced through diversification. Beta formula Answer: standard deviation of security/standard deviation of market X correlation coefficient CAPM Answer: Capital Asset pricing model. Calculates the required return for an individual stock or portfolio 68% of returns Answer: 1 standard deviation 95% of returns Answer: 2 standard deviations 99% of returns Answer: 3 standard deviations Capital market line Answer: Graphical representation of the relationship between risk and return, where risk is measured by standard deviation; the CML includes the concept of a risk free rate of return Common misinterpretation of the investment pyramid Answer: The idea that the larger base indicates that a larger proportion of the client's funds should be invested in the lower tier financial instruments and that other investment instruments should be funded in increasingly smaller proportions