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1 | |
Which of the following statements regarding risk-averse investors is true? |
| | A) | They only accept risky investments that offer risk premiums over the risk-free rate. |
| | B) | They accept investments that are fair games. |
| | C) | They only care about rate of return. |
| | D) | They are willing to accept lower returns and high risk. |
| | E) | A and B. |
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2 | |
Olivia is a risk-averse investor. Alex is a less risk-averse investor than Olivia. Therefore, |
| | A) | for the same risk, Alex requires a higher rate of return than Olivia. |
| | B) | for the same return, Alex tolerates higher risk than Olivia. |
| | C) | for the same risk, Olivia requires a lower rate of return than Alex. |
| | D) | for the same return, Olivia tolerates higher risk than Alex. |
| | E) | cannot be determined. |
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3 | |
If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor? |
| | A) | An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40. |
| | B) | An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60. |
| | C) | An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70. |
| | D) | An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80 |
| | E) | neither A nor B would be chosen. |
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4 | |
The exact indifference curves of different investors |
| | A) | can be calculated precisely with the use of advanced calculus. |
| | B) | cannot be known with perfect certainty. |
| | C) | although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client. |
| | D) | B and C. |
| | E) | none of the above. |
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5 | |
Which one of the following statements regarding hedging is true? |
| | A) | Hedging is adding securities to an existing portfolio to increase the overall return. |
| | B) | Hedging is a strategy used by investors to reduce the risk of a portfolio. |
| | C) | Hedging is a strategy used by investors to increase both the risk and return of a portfolio |
| | D) | Hedging is a strategy used to increase portfolio volatility. |
| | E) | None of the above is true. |
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6 | |
The presence of risk means that |
| | A) | more than one outcome is possible. |
| | B) | investors will lose money. |
| | C) | the standard deviation of the payoff is larger than its expected value. |
| | D) | final wealth will be greater than initial wealth. |
| | E) | terminal wealth will be less than initial wealth. |
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7 | |
Adding a home insurance policy to your portfolio of assets is an example of |
| | A) | speculating. |
| | B) | asset dominance. |
| | C) | risk neutrality. |
| | D) | aversion to risk. |
| | E) | hedging. |
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8 | |
McKenzie is more risk-averse than Kaitlin. On a graph that shows McKenzie's and Kaitlin's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis.
I) McKenzie's indifference curves will have flatter slopes than Kaitlin's.
II) McKenzie and Kaitlin's indifference curves might intersect.
III) McKenzie and Kaitlin's indifference curves will not intersect.
IV) McKenzie's indifference curves will have steeper slopes than Kaitlin's.
V) McKenzie's indifference curves will be downward sloping and Kaitlin's will be upward sloping. |
| | A) | I and V |
| | B) | I and III |
| | C) | III and IV |
| | D) | I and II |
| | E) | II and IV |
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9 | |
The standard deviation of a portfolio that has 40% of its value invested in a risk-free asset and 60% of its value invested in a risky asset with a standard deviation of 30% is |
| | A) | 18%. |
| | B) | 14%. |
| | C) | 21%. |
| | D) | 24%. |
| | E) | 20%. |
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10 | |
Consider the following two investment alternatives. First, a risky portfolio that pays a 20 percent rate of return with a probability of 70% or a 7 percent return with a probability of 30%, and second, a T-bill that pays 3 percent. The risk premium on the risky investment is |
| | A) | 12.45%. |
| | B) | 13.1%. |
| | C) | 9.75%. |
| | D) | 15.6%. |
| | E) | none of the above |
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