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Multiple Choice



1

Which of the following would be included in a definition of risk:
A)Risk is a not measure of uncertainty.
B)Risk is unavoidable.
C)Risk doesn't have a time horizon.
D)Risk seldom involves some future payoff.
2

All other factors held constant:
A)An investment with less risk should sell for a lower price and offer a lower return.
B)An investment with more risk should sell for a lower price and offer a higher return.
C)An investment with less risk should sell for a lower price and offer a higher return.
D)An investment with more risk should offer a lower return and sell for a higher price.
3

Probability of an outcome sums to one because:
A)The outcome is more likely to occur than not.
B)The outcome is certain not to occur.
C)Something has to happen.
D)There is no way of determining the answer: without the probabilities for the other outcomes.
4

If a die is rolled, the probability of coming up with a one is:
A)1/12 or 8.3 percent.
B)zero.
C)1/6 or 16.7 percent.
D)None of the above.
5

If an investment will return $1000 ½ of the time and $600 ½ of the time, the expected value of the investment is:
A)$1,600
B)$800
C)$400
D)None of the above.
6

An investor puts $1000 into an investment that will return $1,350 one-half of the time and $850 the remainder of the time. The expected return for this investor is:
A)$1,000
B)9.0%
C)8.5%
D)10.0%
7

The variance is generally less useful than the standard deviation because:
A)It is easier to calculate.
B)Variance is a measure of risk, where standard deviation is a measure of return.
C)Standard deviation is calculated in the same units as payoffs and variance isn't.
D)None of the above.
8

Given a choice between two investments with the same expected payoff:
A)Most people will select the one with the highest variance.
B)Most people will opt for the one with the higher standard deviation.
C)Most people will be indifferent since the expected payoffs are the same.
D)Most people will choose the one with the lower standard deviation.
9

A risk seeking investor versus a risk-neutral investor:
A)Will always take a risk, while the risk neutral investor will not.
B)Needs less compensation for the same risk versus the risk neutral investor.
C)Will not take the same risks as the risk neutral investor if the expected returns are equal.
D)None of the above.
10

A risk-averse investor will:
A)Always prefer an investment with a lower expected return.
B)Always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty.
C)Always require a certain return.
D)Always focus exclusively on the expected return.
11

The risk premium for an investment:
A)Increases with risk.
B)Is a fixed amount added to the risk free return.
C)Is negative for U.S. Treasury Securities.
D)Is negative for risk averse investors.
E)b and c
12

When the auto manufacturing industry does poorly due to a recession this is an example of:
A)Idiosyncratic risk
B)Systematic risk.
C)Risk premium.
D)Unique risk.
13

Diversification is the principle of:
A)Holding more than one risk at a time.
B)Reducing the risks we carry to just two.
C)Creating risk to increase returns.
D)Eliminating investments from our portfolio that have idiosyncratic risk.
14

If ABC Inc. and XYZ Inc. have returns that are perfectly negatively correlated:
A)Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will reduce risk.
B)Adding ABC Inc. to a portfolio that includes only XYZ Inc. will increase risk.
C)Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase nor decrease the risk of the portfolio.
D)Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase nor decrease idiosyncratic risk but will lower systematic risk.
15

Spreading involves:
A)Finding assets whose returns are perfectly negatively correlated.
B)Building a portfolio of assets whose returns move together.
C)Investing in bonds and avoiding stocks during bad times.
D)Adding assets to a portfolio that move independently.





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