Question 1

An investor who diversifies by purchasing a 50-50 mix of two stocks that are not perfectly positively correlated will find that the standard deviation of the portfolio is:

Accepted Answer

A) the sum of the standard deviations of the two individual stocks. 
B) greater than the sum of the standard deviations of the individual stocks. 
C) greater than the standard deviation from holding the same balance in only one of these stocks. 
D) less than the standard deviation from holding the same balance in only one of these stocks. 
A) the sum of the standard deviations of the two individual stocks. 
B) greater than the sum of the standard deviations of the individual stocks. 
C) greater than the standard deviation from holding the same balance in only one of these stocks. 
D) less than the standard deviation from holding the same balance in only one of these stocks. D

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. C

Question 3

When measuring the risk of an asset:

Accepted Answer

A) one must measure the uncertainty about the size of future payoffs. 
B) it is necessary to incorporate uncertainties that are not quantifiable. 
C) one must remember that the concept of risk applies only to financial markets, not to financial intermediaries. 
D) one cannot use other investments to evaluate the asset's risk. 
A) one must measure the uncertainty about the size of future payoffs. 
B) it is necessary to incorporate uncertainties that are not quantifiable. 
C) one must remember that the concept of risk applies only to financial markets, not to financial intermediaries. 
D) one cannot use other investments to evaluate the asset's risk. A

Question 4

An investment will pay $2000 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 5

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 6

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 7

Explain the rapid rise in popularity of mutual funds.

Accepted Answer

The chapter covered the topic of spreadi

Question 8

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 and B have the same expected value, but A has lower risk than B. 
D) Investment A has a greater expected value than B, but B has less risk. 
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 and B have the same expected value, but A has lower risk than B. 
D) Investment A has a greater expected value than B, but B has less risk.

Question 9

Given a choice between two investments with the same expected payoff most people will:

Accepted Answer

A) choose the one with the lower standard deviation. 
B) opt for the one with the higher standard deviation. 
C) be indifferent since the expected payoffs are the same. 
D) calculate the variance to assess the relative risks of the two choices. 
A) choose the one with the lower standard deviation. 
B) opt for the one with the higher standard deviation. 
C) be indifferent since the expected payoffs are the same. 
D) calculate the variance to assess the relative risks of the two choices.

Question 10

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 11

High oil prices tend to harm the auto industry and benefit oil companies; therefore, high oil prices are an example of:

Accepted Answer

A) systematic risk. 
B) idiosyncratic risk. 
C) neither systematic nor idiosyncratic risk. 
D) both systematic and idiosyncratic risk. 
A) systematic risk. 
B) idiosyncratic risk. 
C) neither systematic nor idiosyncratic risk. 
D) both systematic and idiosyncratic risk.

Question 12

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 13

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 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?
E.V.= 0.5($200) + 0.5($0) = $100
E.V.= PH (H) + PT(T); where H is the payoff from the coin turning up heads and T is the payoff if the coin turns up tails.PH and PT are the probabilities of the coin turning up heads or tails respectively.Substituting actual values in out formula reveals:

Accepted Answer

The expected value of this event is calc

Question 15

Consider an individual who plans to buy a new home.He has two options: (i) pay for mortgage insurance (that insures the lender in case the borrower defaults), or (ii) pay the lender a higher interest rate for the mortgage.Describe how these two options are related to the concept of risk premium and the lender's aversion to risk.Why does the interest rate on the mortgage differ in these two options?

Accepted Answer

In option (ii), the risk premium on the

Question 16

Which of the following investment strategies involves generating a higher expected rate of return through increasing risk?

Accepted Answer

A) Diversifying 
B) Hedging risk 
C) Leverage 
D) Value at risk 
A) Diversifying 
B) Hedging risk 
C) Leverage 
D) Value at risk

Question 17

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 18

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.

Question 19

You buy an asset for $2500.The asset will return $3300 half of the time and $2700, the other half.The expected return is 20%(a gain of $500) and the standard deviation is 12%($300).How would using $1,250 of borrowed funds change the expected return and standard deviation specifically?

Accepted Answer

Borrowing 50% of the funds needed to pur

Question 20

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.

Exam 5: Understanding Risk

An investor who diversifies by purchasing a 50-50 mix of two stocks that are not perfectly positively correlated will find that the standard deviation of the portfolio is:

An automobile insurance company on average charges a premium that:

When measuring the risk of an asset:

An investment will pay $2000 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:

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

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.

Explain the rapid rise in popularity of mutual funds.

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?

Given a choice between two investments with the same expected payoff most people will:

Hedging is possible only when investments have:

High oil prices tend to harm the auto industry and benefit oil companies; therefore, high oil prices are an example of:

Unique risk is another name for:

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

Which of the following investment strategies involves generating a higher expected rate of return through increasing risk?

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

Which of the following is true?

You buy an asset for $2500.The asset will return $3300 half of the time and $2700, the other half.The expected return is 20%(a gain of $500) and the standard deviation is 12%($300).How would using $1,250 of borrowed funds change the expected return and standard deviation specifically?

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:

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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