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| 1 | |
Risk: |
| | A) | is a measure of uncertainty. |
| | B) | is a measure of the expected value of the payoff of an investment. |
| | C) | does not vary across alternative investments. |
| | D) | None of the above is correct. |
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| 2 | |
Risk: |
| | A) | involves uncertain future outcomes. |
| | B) | is measured relative to a benchmark. |
| | C) | involves future payoffs. |
| | D) | All of the above are correct. |
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| 3 | |
Consider a security that has a 50% probability of paying $800 and a 50% probability of paying $1,400 next year. The expected value of next year's payoff equals: |
| | A) | $800. |
| | B) | $1,000. |
| | C) | $1,100. |
| | D) | $1,200. |
| | E) | $1,400. |
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| 4 | |
Consider a security that has a 50% probability of paying $800 and a 50% probability of paying $1,400 next year. If the current price of this security is $1,000, the expected rate of return on this security equals: |
| | A) | –20%. |
| | B) | 10%. |
| | C) | 20%. |
| | D) | 40%. |
| | E) | None of the above is correct. |
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| 5 | |
Which of the following is an accurate statement concerning the use of variance and standard deviation for a variable measured in dollars? |
| | A) | The standard deviation of the variable is measured in units of squared dollars and this is inappropriate because dollars are rectangular, not square. |
| | B) | Both variance and standard deviation are measured in terms of dollars. |
| | C) | Standard deviation is measured in dollars, but the variance is measured in squared dollars. |
| | D) | None of the above. |
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| 6 | |
If two risky securities provide a payoff with the same expected value in 1 year, risk is higher for the security for which the: |
| | A) | variance is higher. |
| | B) | standard deviation is higher. |
| | C) | Both of the above are correct. |
| | D) | None of the above is correct. |
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| 7 | |
Suppose that the variance in returns for an investment is 100. The standard deviation is: |
| | A) | 10. |
| | B) | 100. |
| | C) | 1,000. |
| | D) | 10,000. |
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| 8 | |
The probability of an event occurring: |
| | A) | is a measure of the relative frequency of the event's occurrence over repeated samples. |
| | B) | may be negative. |
| | C) | may be greater than one. |
| | D) | All of the above are correct. |
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| 9 | |
The sum of the probabilities for all possible outcomes of an investment: |
| | A) | will always be less than 1. |
| | B) | will always be greater than 1. |
| | C) | equals 1. |
| | D) | may be greater than, less than, or equal to 1, depending on the actual probabilities of the individual outcomes. |
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| 10 | |
Suppose that an investment has a 50% probability of a payoff of $1,030 and a 50% probability of a payoff of $990. Which of the following represents the variance of the payoff? |
| | A) | 20 dollars |
| | B) | 40 dollars |
| | C) | 200 dollars2 |
| | D) | 400 dollars2 |
| | E) | None of the above is correct. |
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| 11 | |
Suppose that an investment has a 50% probability of a payoff of $1,030 and a 50% probability of a payoff of $990. Which of the following represents the standard deviation of the payoff? |
| | A) | 20 dollars |
| | B) | 40 dollars |
| | C) | 200 dollars2 |
| | D) | 400 dollars2 |
| | E) | None of the above is correct. |
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| 12 | |
Suppose that two investments have an expected payoff of $1,200, but one has a standard deviation of 30 while the other has a standard deviation of 40. A risk-averse individual will prefer the investment that: |
| | A) | has a standard deviation of 40 because more is preferred to less. |
| | B) | has a standard deviation of 30 because this investment is less risky. |
| | C) | has a standard deviation of 40 because this investment is less risky. |
| | D) | None of the above is correct. |
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| 13 | |
Value-at-risk measures: |
| | A) | the expected value of the return from an investment. |
| | B) | the maximum expected gain associated with an investment. |
| | C) | the worst possible loss that may occur over a specific time horizon, at a given probability. |
| | D) | None of the above is correct. |
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| 14 | |
Given two investments with the same expected payoff in a given time horizon, a risk-neutral individual will: |
| | A) | always prefer an alternative with the lower variance in returns. |
| | B) | always prefer an alternative with the higher variance in returns. |
| | C) | be indifferent. |
| | D) | care only about the standard deviation of the payoff, not the variance. |
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| 15 | |
An individual is risk-averse if he or she: |
| | A) | prefers a certain return to a risky return with the same expected payoff. |
| | B) | prefers a risky return to a certain return with the same expected payoff. |
| | C) | is indifferent between a certain return and a risky return with the same expected payoff. |
| | D) | always prefers a return with a greater variance, no matter what the expected payoff. |
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| 16 | |
If the expected value of the potential payoff is the same for two investments, the risk premium is higher for an investment that has a _______ in payoffs. |
| | A) | lower variance |
| | B) | lower standard deviation |
| | C) | larger standard deviation |
| | D) | Both a and b are correct. |
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| 17 | |
Risks that are unique to specific people, assets, or firms, are called: |
| | A) | systematic risks. |
| | B) | idiosyncratic risks. |
| | C) | sycophantic risks. |
| | D) | idiopathic risks. |
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| 18 | |
Systematic risk is a form of risk that is: |
| | A) | unique to specific people, assets, or firms. |
| | B) | economy-wide. |
| | C) | sycophantic. |
| | D) | None of the above is correct. |
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| 19 | |
Hedging reduces risk by: |
| | A) | combining assets with high standard deviations of payoffs with those with low standard deviations of payoffs. |
| | B) | engaging in diversification by buying a mix of assets that have uncorrelated returns. |
| | C) | acquiring assets with offsetting risks. |
| | D) | increasing the variance in the payoff associated with a portfolio of investments. |
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| 20 | |
Risk spreading involves: |
| | A) | increasing the variance in outcomes. |
| | B) | reducing the variance in the returns on a portfolio through diversification. |
| | C) | trying to shift the blame for mistakes to others. |
| | D) | None of the above is correct. |
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