Question 1

The fact that over the long run the return on common stocks has been higher than that on long-term U.S. Treasury bonds is partially explained by the fact that:

Accepted Answer

A)  A lot more money is invested in common stocks than U.S. Treasury bonds. 
B)  There are regulations on the interest rates U.S. Treasury bonds can offer. 
C)  The risk premium is higher on common stocks. 
D)  Risk-averse investors buy more common stock. 
A)  A lot more money is invested in common stocks than U.S. Treasury bonds. 
B)  There are regulations on the interest rates U.S. Treasury bonds can offer. 
C)  The risk premium is higher on common stocks. 
D)  Risk-averse investors buy more common stock. C

Question 2

Suppose that Fly-By-Night Airlines, Inc. has a return of 5% twenty percent of the time and 0% the rest of the time. The expected return from Fly-By-Night is:

Accepted Answer

A)  10%. 
B)  0.1%. 
C)  0.2%. 
D)  1.0%. 
A)  10%. 
B)  0.1%. 
C)  0.2%. 
D)  1.0%. D

Question 3

Which of the following is true?

Accepted Answer

A)  Investments with higher risk generally have a higher expected return than risk-free investments. 
B)  Investments that pay a return over a longer time horizon generally have less risk. 
C)  Investments with a greater variance in the size of the future payoff generally pay a lower expected return. 
D)  Risk-free investments are the best benchmark for measuring the risk of all investment strategies. 
A)  Investments with higher risk generally have a higher expected return than risk-free investments. 
B)  Investments that pay a return over a longer time horizon generally have less risk. 
C)  Investments with a greater variance in the size of the future payoff generally pay a lower expected return. 
D)  Risk-free investments are the best benchmark for measuring the risk of all investment strategies. A

Question 4

Investing in a mutual fund made up of hundreds of stocks of different companies is an example of all of the following except:

Accepted Answer

A)  spreading risk. 
B)  diversifying. 
C)  risk reduction. 
D)  increasing the variance of a portfolio. 
A)  spreading risk. 
B)  diversifying. 
C)  risk reduction. 
D)  increasing the variance of a portfolio.

Question 5

If an investment has a 20% (0.20) probability of returning $1,000; a 30% (0.30) probability of returning $1,500; and a 50% (0.50) probability of returning $1,800; the expected value of the investment is:

Accepted Answer

A)  $1,433.33 
B)  $1,550.00 
C)  $2,800.00 
D)  $1,600.00 
A)  $1,433.33 
B)  $1,550.00 
C)  $2,800.00 
D)  $1,600.00

Question 6

Hedging is possible only when investments have:

Accepted Answer

A)  opposite payoff patterns. 
B)  the same payoff patterns. 
C)  payoffs that are independent of each other. 
D)  the same risk premiums. 
A)  opposite payoff patterns. 
B)  the same payoff patterns. 
C)  payoffs that are independent of each other. 
D)  the same risk premiums.

Question 7

Unexpected inflation can benefit some people/firms and harm others. This is an example of:

Accepted Answer

A)  systematic risk. 
B)  unmeasured risk. 
C)  idiosyncratic risk. 
D)  zero risk since the effects balance. 
A)  systematic risk. 
B)  unmeasured risk. 
C)  idiosyncratic risk. 
D)  zero risk since the effects balance.

Question 8

The main reason for diversification for an investor is to:

Accepted Answer

A)  take advantage of the fact that returns of assets are perfectly positively correlated. 
B)  take advantage of the fact that returns on assets are not perfectly correlated. 
C)  lower transaction costs. 
D)  gain from the greater returns that come from greater risk. 
A)  take advantage of the fact that returns of assets are perfectly positively correlated. 
B)  take advantage of the fact that returns on assets are not perfectly correlated. 
C)  lower transaction costs. 
D)  gain from the greater returns that come from greater risk.

Question 9

Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

Accepted Answer

A)  Investment A and B have the same expected value, but A has greater risk. 
B)  Investment B has a higher expected value than A, but also greater risk. 
C)  Investment A has a greater expected value than B, but B has less risk. 
D)  None of the statements are correct 
A)  Investment A and B have the same expected value, but A has greater risk. 
B)  Investment B has a higher expected value than A, but also greater risk. 
C)  Investment A has a greater expected value than B, but B has less risk. 
D)  None of the statements are correct

Question 10

A $600 investment has the following payoff frequency: a quarter of the time it will be $0; three quarters of the time it will pay off $1000. Its standard deviation and value at risk respectively are:

Accepted Answer

A)  $750; $600 
B)  $433; $600 
C)  $0; $1,000 
D)  $433; $1,000 
A)  $750; $600 
B)  $433; $600 
C)  $0; $1,000 
D)  $433; $1,000

Question 11

Inflation presents risk because:

Accepted Answer

A)  inflation is always present. 
B)  inflation cannot be measured. 
C)  there are different ways to measure it. 
D)  there is no certainty regarding what inflation will be in the future. 
A)  inflation is always present. 
B)  inflation cannot be measured. 
C)  there are different ways to measure it. 
D)  there is no certainty regarding what inflation will be in the future.

Question 12

The fact that not everyone places all of his/her savings in U.S. Treasury bonds indicates that:

Accepted Answer

A)  most investors are not risk averse. 
B)  many investors are actually risk seekers. 
C)  even risk-averse people will take risk if they are compensated for it. 
D)  most people are risk-neutral. 
A)  most investors are not risk averse. 
B)  many investors are actually risk seekers. 
C)  even risk-averse people will take risk if they are compensated for it. 
D)  most people are risk-neutral.

Question 13

Changes in general economic conditions usually produce:

Accepted Answer

A)  systematic risk. 
B)  idiosyncratic risk. 
C)  risk reduction. 
D)  lower risk premiums. 
A)  systematic risk. 
B)  idiosyncratic risk. 
C)  risk reduction. 
D)  lower risk premiums.

Question 14

Which of the following individuals is least likely to use value at risk as an important factor in his/her investment decision?

Accepted Answer

A)  An individual considering a mortgage to buy his first home. 
B)  A family considering purchasing health insurance. 
C)  A policy maker considering regulation of depository institutions. 
D)  A mutual fund manager choosing the allocation of investments in the fund's portfolio. 
A)  An individual considering a mortgage to buy his first home. 
B)  A family considering purchasing health insurance. 
C)  A policy maker considering regulation of depository institutions. 
D)  A mutual fund manager choosing the allocation of investments in the fund's portfolio.

Question 15

Leverage:

Accepted Answer

A)  reduces risk. 
B)  is synonymous with risk-free investment. 
C)  increases expected rate of return. 
D)  leads to smaller changes in the investment's price. 
A)  reduces risk. 
B)  is synonymous with risk-free investment. 
C)  increases expected rate of return. 
D)  leads to smaller changes in the investment's price.

Question 16

How are the decisions of government policy makers, such as the Federal Reserve, related to risk and an individual investor's portfolio?

Accepted Answer

The decisions of government policy maker

Question 17

An individual owns a $100,000 home. She determines that her chances of suffering a fire in any given year to be 1/1000 (0.001). She correctly calculates her expected loss in any year to be
$100. Explain why this really isn't a good way to measure her potential for loss.

Accepted Answer

While all of her calculations may be acc

Question 18

An investment pays $1,500 half of the time and $500 half of the time. Its expected value and variance respectively are:

Accepted Answer

A)  $1,000; 500,000 dollars 
B)  $2,000; (250,000 dollars)² 
C)  $1,000; 250,000 dollars 
D)  $1,000; 250,000 dollars² 
A)  $1,000; 500,000 dollars 
B)  $2,000; (250,000 dollars)² 
C)  $1,000; 250,000 dollars 
D)  $1,000; 250,000 dollars²

Question 19

If ABC Inc. and XYZ Inc. have returns that are perfectly positively correlated:

Accepted Answer

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. 
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.

Question 20

A risk-averse investor will:

Accepted Answer

A)  never 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 that has any amount of uncertainty. 
C)  always require a certain return. 
D)  always focus exclusively on the expected return. 
A)  never 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 that has any amount of uncertainty. 
C)  always require a certain return. 
D)  always focus exclusively on the expected return.

Exam 5: Understanding Risk

The fact that over the long run the return on common stocks has been higher than that on long-term U.S. Treasury bonds is partially explained by the fact that:

Suppose that Fly-By-Night Airlines, Inc. has a return of 5% twenty percent of the time and 0% the rest of the time. The expected return from Fly-By-Night is:

Which of the following is true?

Investing in a mutual fund made up of hundreds of stocks of different companies is an example of all of the following except:

If an investment has a 20% (0.20) probability of returning $1,000; a 30% (0.30) probability of returning $1,500; and a 50% (0.50) probability of returning $1,800; the expected value of the investment is:

Hedging is possible only when investments have:

Unexpected inflation can benefit some people/firms and harm others. This is an example of:

The main reason for diversification for an investor is to:

Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

A $600 investment has the following payoff frequency: a quarter of the time it will be $0; three quarters of the time it will pay off $1000. Its standard deviation and value at risk respectively are:

Inflation presents risk because:

The fact that not everyone places all of his/her savings in U.S. Treasury bonds indicates that:

Changes in general economic conditions usually produce:

Which of the following individuals is least likely to use value at risk as an important factor in his/her investment decision?

Leverage:

How are the decisions of government policy makers, such as the Federal Reserve, related to risk and an individual investor's portfolio?

An individual owns a $100,000 home. She determines that her chances of suffering a fire in any given year to be 1/1000 (0.001). She correctly calculates her expected loss in any year to be $100. Explain why this really isn't a good way to measure her potential for loss.

An investment pays $1,500 half of the time and $500 half of the time. Its expected value and variance respectively are:

If ABC Inc. and XYZ Inc. have returns that are perfectly positively correlated:

A risk-averse investor will:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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