Question 1

What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?

Accepted Answer

We can use the general formula:
Leverage

Question 2

An automobile insurance company on average charges a premium that:

Accepted Answer

A)  equals the expected loss from each driver. 
B)  is less than the expected loss from each driver. 
C)  is greater than the expected loss from each driver. 
D)  equals 1/(expected loss) of each driver. 
A)  equals the expected loss from each driver. 
B)  is less than the expected loss from each driver. 
C)  is greater than the expected loss from each driver. 
D)  equals 1/(expected loss) of each driver.

Question 3

Identify at least three possible sources for a risk an individual may face in planning for retirement.

Accepted Answer

In planning for retirement an individual

Question 4

The measure of risk that focuses on the worst possible outcome is called:

Accepted Answer

A)  expected rate of return. 
B)  risk-free rate of return. 
C)  standard deviation of return. 
D)  value at risk. 
A)  expected rate of return. 
B)  risk-free rate of return. 
C)  standard deviation of return. 
D)  value at risk.

Question 5

When the home construction industry does poorly due to a recession, this is an example of:

Accepted Answer

A)  systematic risk. 
B)  idiosyncratic risk. 
C)  risk premium. 
D)  unique risk. 
A)  systematic risk. 
B)  idiosyncratic risk. 
C)  risk premium. 
D)  unique risk.

Question 6

Explain the rapid rise in popularity of mutual funds.

Accepted Answer

The chapter covered the topic of spreadi

Question 7

Calculate the expected value, the expected return, the variance and the standard deviation of an asset that requires a $1000 investment, but will return $850 half of the time and $1,250 the other half of the time.

Accepted Answer

Expected value is = 0.5($850) + 0.5($1,2

Question 8

Unique risk is another name for:

Accepted Answer

A)  market risk. 
B)  systematic risk. 
C)  the risk premium. 
D)  idiosyncratic risk. 
A)  market risk. 
B)  systematic risk. 
C)  the risk premium. 
D)  idiosyncratic risk.

Question 9

Diversification can eliminate:

Accepted Answer

A)  all risk in a portfolio. 
B)  risk only if the investor is risk averse. 
C)  the systematic risk in a portfolio. 
D)  the idiosyncratic risk in a portfolio. 
A)  all risk in a portfolio. 
B)  risk only if the investor is risk averse. 
C)  the systematic risk in a portfolio. 
D)  the idiosyncratic risk in a portfolio.

Question 10

What would be the standard deviation for a $1,000 risk-free asset that returns $1,100?

Accepted Answer

The standard deviation for this asset wo

Question 11

Briefly explain the difference between idiosyncratic risk and systematic risk. Provide an example of each.

Accepted Answer

Systematic risk is risk resulting from s

Question 12

A portfolio of assets has lower risk than holding one asset, but the same expected return and higher transaction costs. Which of the following statements is most correct?

Accepted Answer

A)  The portfolio is attractive to people who are risk-averse and risk-neutral, but not to risk seekers. 
B)  The portfolio is attractive to investors who are risk-neutral. 
C)  The portfolio is not attractive to investors who are risk-neutral. 
D)  The portfolio is attractive to investors who are risk seekers. 
A)  The portfolio is attractive to people who are risk-averse and risk-neutral, but not to risk seekers. 
B)  The portfolio is attractive to investors who are risk-neutral. 
C)  The portfolio is not attractive to investors who are risk-neutral. 
D)  The portfolio is attractive to investors who are risk seekers.

Question 13

A risk-averse investor will:

Accepted Answer

A)  always accept a greater risk with a greater expected return. 
B)  only invest in assets providing certain returns. 
C)  never accept lower risk if it means accepting a lower expected return. 
D)  sometimes accept a lower expected return if it means less risk. 
A)  always accept a greater risk with a greater expected return. 
B)  only invest in assets providing certain returns. 
C)  never accept lower risk if it means accepting a lower expected return. 
D)  sometimes accept a lower expected return if it means less risk.

Question 14

What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and tails pays zero?

Accepted Answer

The expected value of this event is calc

Question 15

An individual faces two alternatives for an investment. Asset 'A' has the following probability of return schedule:
   
Asset 'B' has a certain return of 10.25%. If this individual selects asset 'A' does it imply she is risk averse? Explain.

Accepted Answer

Since both assets provide the same expec

Question 16

A risk-averse investor compared to a risk-neutral investor would:

Accepted Answer

A)  offer the same price for an investment as the risk-neutral investor. 
B)  require a higher risk premium for the same investment as a risk-neutral investor. 
C)  place more focus on expected return and less on return than the risk-neutral investor. 
D)  place less focus on expected return than the risk-neutral investor. 
A)  offer the same price for an investment as the risk-neutral investor. 
B)  require a higher risk premium for the same investment as a risk-neutral investor. 
C)  place more focus on expected return and less on return than the risk-neutral investor. 
D)  place less focus on expected return than the risk-neutral investor.

Question 17

An investment will pay $2,000 a quarter of the time; $1,600 half of the time and $1,400 a quarter of the time. The standard deviation of this asset is:

Accepted Answer

A)  $600 
B)  $1,650 
C)  $47,500 
D)  $217.94 
A)  $600 
B)  $1,650 
C)  $47,500 
D)  $217.94

Question 18

A risk-averse investor versus a risk-neutral investor:

Accepted Answer

A)  will never take a risk, while the risk neutral investor will. 
B)  needs greater compensation for the same risk versus the risk neutral investor. 
C)  will take the same risks as the risk neutral investor if the expected returns are equal. 
D)  needs less compensation for the same risk versus the risk neutral investor. 
A)  will never take a risk, while the risk neutral investor will. 
B)  needs greater compensation for the same risk versus the risk neutral investor. 
C)  will take the same risks as the risk neutral investor if the expected returns are equal. 
D)  needs less compensation for the same risk versus the risk neutral investor.

Question 19

Explain the following: Risk results from the fact that more outcomes could happen than will happen.

Accepted Answer

Risk results from uncertainty, not knowi

Question 20

All other factors held constant, an investment:

Accepted Answer

A)  with more risk should offer a lower return and sell for a higher price. 
B)  with less risk should sell for a lower price and offer a higher expected return. 
C)  with more risk should sell for a lower price and offer a higher expected return. 
D)  with less risk should sell for a lower price and offer a lower return. 
A)  with more risk should offer a lower return and sell for a higher price. 
B)  with less risk should sell for a lower price and offer a higher expected return. 
C)  with more risk should sell for a lower price and offer a higher expected return. 
D)  with less risk should sell for a lower price and offer a lower return.

Exam 5: Understanding Risk

What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?

An automobile insurance company on average charges a premium that:

Identify at least three possible sources for a risk an individual may face in planning for retirement.

The measure of risk that focuses on the worst possible outcome is called:

When the home construction industry does poorly due to a recession, this is an example of:

Explain the rapid rise in popularity of mutual funds.

Calculate the expected value, the expected return, the variance and the standard deviation of an asset that requires a $1000 investment, but will return $850 half of the time and $1,250 the other half of the time.

Unique risk is another name for:

Diversification can eliminate:

What would be the standard deviation for a $1,000 risk-free asset that returns $1,100?

Briefly explain the difference between idiosyncratic risk and systematic risk. Provide an example of each.

A portfolio of assets has lower risk than holding one asset, but the same expected return and higher transaction costs. Which of the following statements is most correct?

A risk-averse investor will:

What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and tails pays zero?

An individual faces two alternatives for an investment. Asset 'A' has the following probability of return schedule: Asset 'B' has a certain return of 10.25%. If this individual selects asset 'A' does it imply she is risk averse? Explain.

A risk-averse investor compared to a risk-neutral investor would:

An investment will pay $2,000 a quarter of the time; $1,600 half of the time and $1,400 a quarter of the time. The standard deviation of this asset is:

A risk-averse investor versus a risk-neutral investor:

Explain the following: Risk results from the fact that more outcomes could happen than will happen.

All other factors held constant, an investment:

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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