Question 1

Up to what amount would a risk-neutral gambler pay to enter a game where on the flip of a fair coin, if you call the correct outcome the payoff is $2,000?

Accepted Answer

A) More than $1000 but less than $2000. 
B) Up to $2,000. 
C) Up to $1,000. 
D) More than $1,500. 
A) More than $1000 but less than $2000. 
B) Up to $2,000. 
C) Up to $1,000. 
D) More than $1,500.

Question 2

When considering different investments, a risk-averse investor is most likely to focus on purchasing:

Accepted Answer

A) investments with the greatest spread in the expected rate of return. 
B) investments that offer the lowest standard deviation in the investments' expected rates of return for any given expected rate of return. 
C) only risk-free investments. 
D) investments with the lowest risk premium, regardless of the expected rate of return. 
A) investments with the greatest spread in the expected rate of return. 
B) investments that offer the lowest standard deviation in the investments' expected rates of return for any given expected rate of return. 
C) only risk-free investments. 
D) investments with the lowest risk premium, regardless of the expected rate of return.

Question 3

You study horse racing avidly and discover for this year's Kentucky Derby you think you have the field pretty well figured out.In fact, you calculate the expected return and it is the same as the expected return you are getting from the stock market.Is this investment in the race valuable to you?

Accepted Answer

While the opportunity to win at the hors

Question 4

In investment matters, generally young workers compared to older workers will:

Accepted Answer

A) minimize expected return and focus more on variability. 
B) be less risk-averse. 
C) have equal concern for expected return and variability. 
D) be more risk-averse. 
A) minimize expected return and focus more on variability. 
B) be less risk-averse. 
C) have equal concern for expected return and variability. 
D) be more risk-averse.

Question 5

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 6

Systematic risk:

Accepted Answer

A) is the risk eliminated through diversification. 
B) represents the risk affecting a specific company. 
C) cannot be eliminated through diversification. 
D) is another name for risk unique to an individual asset. 
A) is the risk eliminated through diversification. 
B) represents the risk affecting a specific company. 
C) cannot be eliminated through diversification. 
D) is another name for risk unique to an individual asset.

Question 7

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 8

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 9

If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a 1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?
E.L.= 0.001($100,000) + 0.999($0) = $100.00.Since the expected loss for each individual is $100 per year, the minimum that each would have to pay is $100.00 a year, in fact, given the probability of 1 in a 1000 homeowners in this group suffering a fire each year, at $100 each, on average, there should be just enough to compensate the person suffering the fire.

Accepted Answer

We can calculate the expected loss for a

Question 10

An individual who is risk-averse:

Accepted Answer

A) never takes risks. 
B) accepts risk but only when the expected return is very small. 
C) requires larger compensation when the risk increases. 
D) will accept a lower return as risk rises. 
A) never takes risks. 
B) accepts risk but only when the expected return is very small. 
C) requires larger compensation when the risk increases. 
D) will accept a lower return as risk rises.

Question 11

Which of the following statements is true?

Accepted Answer

A) Leverage increases expected return while lowering risk. 
B) Leverage increases risk. 
C) Leverage lowers the expected return and lowers risk. 
D) Leverage lowers the expected return and increases risk. 
A) Leverage increases expected return while lowering risk. 
B) Leverage increases risk. 
C) Leverage lowers the expected return and lowers risk. 
D) Leverage lowers the expected return and increases risk.

Question 12

Considering leverage, can you explain why a mortgage lender would want borrowers to have larger down payments, and when the borrower doesn't the mortgage lender may require mortgage insurance?

Accepted Answer

We saw that leverage can do two things f

Question 13

Consider the following two assets with probability of return = Pi and return = Ri.Calculate the expected return for each and the standard deviation.Which one carries the greatest risk? Why?

Accepted Answer

@#IMG-DLM& For asset A, the expected return = 0.4(

Question 14

If a fair coin is tossed, the probability of coming up with either a head or a tail is:

Accepted Answer

A) ½ or 50 percent. 
B) Zero. 
C) 1 or 100 percent. 
D) Unquantifiable. 
A) ½ or 50 percent. 
B) Zero. 
C) 1 or 100 percent. 
D) Unquantifiable.

Question 15

The expected return from a portfolio made up equally of two assets that move perfectly opposite of each other would have a standard deviation equal to:

Accepted Answer

A) 1.0 
B) -1.0 
C) 0.0 
D) 0.5 
A) 1.0 
B) -1.0 
C) 0.0 
D) 0.5

Question 16

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 17

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 18

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 19

Which of the following statements is false?

Accepted Answer

A) Diversification can reduce risk. 
B) Diversification can reduce risk but only by reducing the expected return. 
C) Diversification reduces idiosyncratic risk. 
D) Diversification allocates savings across more than one asset. 
A) Diversification can reduce risk. 
B) Diversification can reduce risk but only by reducing the expected return. 
C) Diversification reduces idiosyncratic risk. 
D) Diversification allocates savings across more than one asset.

Question 20

If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:

Accepted Answer

A) $1,250. 
B) $1,050. 
C) $1,100. 
D) $2,200. 
A) $1,250. 
B) $1,050. 
C) $1,100. 
D) $2,200.

Exam 5: Understanding Risk

Up to what amount would a risk-neutral gambler pay to enter a game where on the flip of a fair coin, if you call the correct outcome the payoff is $2,000?

When considering different investments, a risk-averse investor is most likely to focus on purchasing:

You study horse racing avidly and discover for this year's Kentucky Derby you think you have the field pretty well figured out.In fact, you calculate the expected return and it is the same as the expected return you are getting from the stock market.Is this investment in the race valuable to you?

In investment matters, generally young workers compared to older workers will:

Inflation presents risk because:

Systematic risk:

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

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

An individual who is risk-averse:

Which of the following statements is true?

Considering leverage, can you explain why a mortgage lender would want borrowers to have larger down payments, and when the borrower doesn't the mortgage lender may require mortgage insurance?

Consider the following two assets with probability of return = Pi and return = Ri.Calculate the expected return for each and the standard deviation.Which one carries the greatest risk? Why?

If a fair coin is tossed, the probability of coming up with either a head or a tail is:

The expected return from a portfolio made up equally of two assets that move perfectly opposite of each other would have a standard deviation equal 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?

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

A risk-averse investor will:

Which of the following statements is false?

If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:

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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