SECTION C: TWO (2) SHORT ANSWER QUESTIONS [30 marks] Please answer all

Question 1 [15 marks]

a. Define systematic and unsystematic risk. Give an example of each. How can you reduce the systematic risk of a portfolio, and how can you reduce the unsystematic risk of a portfolio? [8 marks]

b. What are the differences between debt and equity? Which is a riskier form of investment, and why?[7 marks]

Question 2 [15 marks]

a. The aim of stock market regulation is to ensure market participants have confidence in the integrity of market operations. Outline the duties of the two main supervisors in Australia: Australian Securities Exchange (ASX) and Australian Securities and Investments Commission (ASIC). [8 mark]

b. Financial institutions incorporate loan covenants into loan contracts. How does positive covenant differ from a negative loan covenant? Explain your answer. [7

7. A reason why shareholders may prefer dividend income to expected capital gains is because:

A. the effective rate of capital gains tax is likely to be less than an investor's marginal income tax.

B. shareholders who require current income can always sell a portion of their portfolio.

C. they distrust future projections.

D. transaction costs such as brokerage fees make selling shares less attractive