What is the primary function of hedging in finance?

To amplify potential profits in a bull market To protect trading positions from losses due to adverse market movements To guarantee a specific return on investment To speculate on short-term price fluctuations

Which of the following is an accurate analogy for hedging?

Planting a diverse variety of crops to mitigate the risk of crop failure Investing in high-growth stocks to outperform the market Building a fence around a garden to protect it from stray animals Taking out a loan to finance a new business venture

Why might an investor choose to hedge a stock position instead of simply selling the stock when they anticipate a market decline?

Hedging allows them to benefit from a potential rebound in the stock price Hedging eliminates all market risk Selling the stock guarantees a profit Hedging incurs higher transaction costs

What are the two main types of risk that investors face?

Systematic risk and unsystematic risk Market risk and credit risk Inflation risk and interest rate risk Political risk and currency risk

Which type of risk can be mitigated through diversification?

Systematic risk Unsystematic risk Both systematic and unsystematic risk Neither systematic nor unsystematic risk

What is the role of beta in the context of hedging?

Beta measures the sensitivity of a stock's price to changes in the overall market Beta indicates the expected return on investment for a stock Beta represents the level of unsystematic risk associated with a stock Beta is a measure of a company's financial health

How can an investor determine the beta of a stock?

By using the SLOPE function in Microsoft Excel By analyzing the company's financial statements By consulting a financial advisor By reviewing historical stock price charts

Why are Nifty futures often used to hedge a portfolio of stocks?

Nifty futures represent the overall Indian stock market Nifty futures have low volatility Nifty futures are suitable for short-term trading Nifty futures offer guaranteed returns

What is the first step in hedging a stock portfolio?

Calculating the portfolio beta Selling all stocks in the portfolio Investing in Nifty futures Determining the hedge value

What is the purpose of calculating the hedge value?

To determine the amount of money needed to fully hedge the portfolio To estimate the potential profit from hedging To assess the riskiness of the portfolio To identify the best stocks to include in the portfolio