Question 17 6 pts To further clarify, you explain the relationship between the correlation coefficient and the R-squared value, which is correctly stated in which of the following statements? (Mark all that apply) the correlation coefficient can show if there is negative or positive correlation, and the r- squared value cannot the correlation coefficient and the r-squared value can both exceed 1.0 in highly correlated conditions the r-squared value is the square of the correlation coefficient completely uncorrelated returns would be close to a zero value for both the correlation coefficient and the r-squared value Question 18 6 pts You then build on that understanding to explain correlation to the general stock market. For example, if BBB stock has an R-Squared value of 0.98 with respect to the S&P 500 index, then which of the following are necessarily true? (Mark all that apply) BBB is highly correlated with the index BBB is performing below the index by 2% on average The beta value of BBB would be a viable investment measurement for BBB because of its high correlation with the index BBB has a significant alpha value that is positive Question 19 6 pts Another risk category is that of "continuation" in stock ownership. This is represented by the market's belief in the ability of a company to continue in the future. You explain that if she is tolerant of this risk and willing to invest in asset sub classes that are heavier in that risk, she will receive a higher return for taking on that risk. Two examples of separate asset sub classes that are heavier invested in that risk are: value stocks and large cap stocks value stocks and small cap stocks growth stocks and large cap stocks O growth stocks and small cap stocks Question 20 6 pts You then give an example of some other specific risks. Here is your example: Jane is a US citizen that regularly buys paintings from foreign countries, setting aside a portion of her US wages each year to pay local artists in their local currencies for their paintings. She then brings them to the US to hold them as investments until she is 60, when she will begin selling them either in the US or back in their countries of origin, to pay for her monthly retirement living expenses. You explain that the kinds of specific risks that Jane is most exposed to in her investment plan are: o credit risk and reinvestment rate risk interest rate risk and inflation risk foreign exchange rate risk and liquidity risk O interest rate risk and reinvestment rate risk Question 21 6 pts In discussing risk, your client expresses concern about bonds being loans to corporations, and sometimes the loans are for a very long time. Her fear is that the interest rate you lock in when you buy the bond could end up being a very unfavorable rate sometime during the long term of the bond. You explain that the term used for measuring the risk your client is talking about (longer maturity bonds being more sensitive to changes in value because of changes in current interest rates) is called: correlation hyperinflation duration O international risk exposure
