Question 1

Which of the following statements about option contracts is correct?

Accepted Answer

A)  Option contracts can create a legal right to buy a commodity. 
B)  Option contracts can create a legal right to sell a financial asset. 
C)  The option holder has the right to exercise the option. 
D)  All of the above are correct. 
A)  Option contracts can create a legal right to buy a commodity. 
B)  Option contracts can create a legal right to sell a financial asset. 
C)  The option holder has the right to exercise the option. 
D)  All of the above are correct.

Question 2

If the covariance between two stocks is 235 and the standard deviation of both stocks are 45 and 22 respectively, what is the Correlation Coefficient between the two stocks?

Accepted Answer

A)  0.24 
B)  0.33 
C)  0.76 
D)  There is not enough information to calculate the Correlation Coefficient. 
A)  0.24 
B)  0.33 
C)  0.76 
D)  There is not enough information to calculate the Correlation Coefficient.

Question 3

Which of the following is not an example of a financial institution that applies collective risk bearing?

Accepted Answer

A)  Swiss banks 
B)  Mutual funds 
C)  Pension plans 
D)  Insurance companies 
A)  Swiss banks 
B)  Mutual funds 
C)  Pension plans 
D)  Insurance companies

Question 4

Which of the following statements about bearing risk collectively is correct?

Accepted Answer

A)  Bearing risk collectively is not very cost-efficient. 
B)  Bearing risk collectively only works for small groups. 
C)  Bearing risk collectively is bearing risk as part of a large group. 
D)  All of the above are correct. 
A)  Bearing risk collectively is not very cost-efficient. 
B)  Bearing risk collectively only works for small groups. 
C)  Bearing risk collectively is bearing risk as part of a large group. 
D)  All of the above are correct.

Question 5

What is the correlation coefficient between the following two investments? Year Return A Return B

Accepted Answer

A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine without knowing the covariance 
A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine without knowing the covariance

Question 6

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome
 
The expected return for this investment is 4.5%

Accepted Answer

A)  5.85% 
B)  0.34% 
C)  8.19% 
D)  14.43% 
A)  5.85% 
B)  0.34% 
C)  8.19% 
D)  14.43%

Question 7

Which of the following is not correct about hedging speculators?

Accepted Answer

A)  They charge a fee for their services. 
B)  They are the counterparty to a risk management derivatives contract. 
C)  They take risks which they mitigate by having superior knowledge of the market they trade in. 
D)  They provide professional management. 
A)  They charge a fee for their services. 
B)  They are the counterparty to a risk management derivatives contract. 
C)  They take risks which they mitigate by having superior knowledge of the market they trade in. 
D)  They provide professional management.

Question 8

Explain the importance of the correlation coefficient for diversification.

Accepted Answer

The correlation coefficient shows how tw

Question 9

When the option holder decides to exercise the option, the option writer has the option to not fulfill the request.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements about risk-bearing financial institutions is incorrect?

Accepted Answer

A)  An example of a risk-bearing financial institution is a mutual fund. 
B)  Risk-bearing financial institutions concentrate their investments in a limited number of assets. 
C)  Risk-bearing financial institutions assume the risks of their customers. 
D)  All of the above are incorrect. 
A)  An example of a risk-bearing financial institution is a mutual fund. 
B)  Risk-bearing financial institutions concentrate their investments in a limited number of assets. 
C)  Risk-bearing financial institutions assume the risks of their customers. 
D)  All of the above are incorrect.

Question 11

Hedging is:

Accepted Answer

A)  selling two investments that are both expected to lose 
B)  buying two investments that are both expected to make a profit 
C)  taking two positions whose gains and losses will offset each other 
D)  buying insurance against a fortuitous loss 
A)  selling two investments that are both expected to lose 
B)  buying two investments that are both expected to make a profit 
C)  taking two positions whose gains and losses will offset each other 
D)  buying insurance against a fortuitous loss

Question 12

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome
 
The expected return for this investment is 5%

Accepted Answer

A)  0.66% 
B)  5.77% 
C)  8.12% 
D)  10.41% 
A)  0.66% 
B)  5.77% 
C)  8.12% 
D)  10.41%

Question 13

Explain when and why a call option has value.

Accepted Answer

A call option is the right to

Question 14

Which of the following statements about the correlation coefficient is correct?

Accepted Answer

A)  The correlation coefficient measures risk. 
B)  The correlation coefficient is a number between -1 and +1. 
C)  The correlation coefficient measures how two variables move relative to each other. 
D)  All of the above are correct. 
A)  The correlation coefficient measures risk. 
B)  The correlation coefficient is a number between -1 and +1. 
C)  The correlation coefficient measures how two variables move relative to each other. 
D)  All of the above are correct.

Question 15

Can risk be completely eliminated?

Accepted Answer

A)  No, never 
B)  Yes, as long as the exposure units are positively correlated 
C)  Yes, as long as the exposure units are not correlated and enough are in the pool 
D)  Yes, as long as the correlation coefficient is 0.1 
A)  No, never 
B)  Yes, as long as the exposure units are positively correlated 
C)  Yes, as long as the exposure units are not correlated and enough are in the pool 
D)  Yes, as long as the correlation coefficient is 0.1

Question 16

Which of the following statements about correlation is incorrect?

Accepted Answer

A)  If two variables are statistically independent of each other, their correlation coefficient is zero. 
B)  Negatively correlated investments offer the best opportunities for diversification. 
C)  If two investments are perfectly correlated, their correlation coefficient is +1. 
D)  The risk of fire is positively correlated with the risk of traffic accidents. 
A)  If two variables are statistically independent of each other, their correlation coefficient is zero. 
B)  Negatively correlated investments offer the best opportunities for diversification. 
C)  If two investments are perfectly correlated, their correlation coefficient is +1. 
D)  The risk of fire is positively correlated with the risk of traffic accidents.

Which of the following statements about option contracts is correct?

If the covariance between two stocks is 235 and the standard deviation of both stocks are 45 and 22 respectively, what is the Correlation Coefficient between the two stocks?

Which of the following is not an example of a financial institution that applies collective risk bearing?

Which of the following statements about bearing risk collectively is correct?

What is the correlation coefficient between the following two investments? Year Return A Return B

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome The expected return for this investment is 4.5%

Which of the following is not correct about hedging speculators?

Explain the importance of the correlation coefficient for diversification.

When the option holder decides to exercise the option, the option writer has the option to not fulfill the request.

Which of the following statements about risk-bearing financial institutions is incorrect?

Hedging is:

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome The expected return for this investment is 5%

Explain when and why a call option has value.

Which of the following statements about the correlation coefficient is correct?

Can risk be completely eliminated?

Which of the following statements about correlation is incorrect?

Introduction to Enterprise Risk Management and Insurance

Risk Identification

Risk Assessment and Pooling

Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Fundamentals of Insurance

Insurable Perils and Insuring Organizations

Insurance Functions

Insurance Markets: Economics and Issues

Insurance Regulation

Insurance Contracts

The Personal Auto Policy

Homeowners Insurance

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions and Options

Annuities

Health Insurance and Disability Income

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

Commercial Property Insurance

Commercial Liability Insurance

Filters

Exam 5: Risk-Handling Techniques: Diversification and Hedging

Which of the following statements about option contracts is correct?

If the covariance between two stocks is 235 and the standard deviation of both stocks are 45 and 22 respectively, what is the Correlation Coefficient between the two stocks?

Which of the following is not an example of a financial institution that applies collective risk bearing?

Which of the following statements about bearing risk collectively is correct?

What is the correlation coefficient between the following two investments? Year Return A Return B

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome The expected return for this investment is 4.5%

Which of the following is not correct about hedging speculators?

Explain the importance of the correlation coefficient for diversification.

When the option holder decides to exercise the option, the option writer has the option to not fulfill the request.

Which of the following statements about risk-bearing financial institutions is incorrect?

Hedging is:

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome The expected return for this investment is 5%

Explain when and why a call option has value.

Which of the following statements about the correlation coefficient is correct?

Can risk be completely eliminated?

Which of the following statements about correlation is incorrect?

Introduction to Enterprise Risk Management and Insurance

Risk Identification

Risk Assessment and Pooling

Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Fundamentals of Insurance

Insurable Perils and Insuring Organizations

Insurance Functions

Insurance Markets: Economics and Issues

Insurance Regulation

Insurance Contracts

The Personal Auto Policy

Homeowners Insurance

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions and Options

Annuities

Health Insurance and Disability Income

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

Commercial Property Insurance

Commercial Liability Insurance

Filters