Question
Check all that apply: A) Among the risks associated with short selling a stock are: - Default risk: potential unlimited losses when buying back the
Check all that apply:
A) Among the risks associated with short selling a stock are:
- Default risk: potential unlimited losses when buying back the stock.
- Regulatory risk: a ban on short sales can create a surge in the stock price.
- Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed.
- Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified.
B) Leveraging your portfolio: (check all that apply)
- Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money.
- Increases your default risk by magnifying the standard deviation (risk) of your portfolio.
- Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero.
- Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified.
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