Question 1

If the returns of two assets are perfectly positively correlated, an investor who puts half of his/her savings into each will:

Accepted Answer

A) Reduce risk 
B) Have a higher expected return 
C) Not gain from diversification 
D) Reduce risk but lower the expected return 
A) Reduce risk 
B) Have a higher expected return 
C) Not gain from diversification 
D) Reduce risk but lower the expected return C

Question 2

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 B

Question 3

Diversification is the principle of:

Accepted Answer

A) Eliminating risk 
B) Reducing the risk we carry to just two 
C) Holding more than one risk at a time 
D) Eliminating investments from our portfolio that have idiosyncratic risk 
A) Eliminating risk 
B) Reducing the risk we carry to just two 
C) Holding more than one risk at a time 
D) Eliminating investments from our portfolio that have idiosyncratic risk C

Question 4

Explain the rapid rise in popularity of mutual funds.

Accepted Answer

The chapter covered the topic of spreadi

Question 5

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 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

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) Investments A and B have the same expected value and equal risk 
E) None of the above 
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) Investments A and B have the same expected value and equal risk 
E) None of the above

Question 8

Which of the following is true?

Accepted Answer

A) Investments with higher risk generally pay a higher 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 pay a higher 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 9

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 10

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 11

Apply the definition of risk provided in the textbook to an individual's decision to purchase a car insurance policy.Suppose that the individual has two possibilities: no accident ($0 gain/loss) and accident (-$30,000 loss).If the probability of an accident is lower than the probability of an accident occurring (say the probability of an accident is 10%), then why do people buy car insurance? How is this related to the concept of value at risk and the time horizon of investment decisions?

Accepted Answer

People buy car insurance in order to sha

Question 12

Why isn't it correct to say that people who are risk averse avoid risk?

Accepted Answer

This statement really isn't correct.A be

Question 13

An investment pays $1000 three quarters of the time, and $0 the remaining time.Its expected value and variance respectively are:

Accepted Answer

A) $1,000: 62,500 dollars 
B) $750; 46,875 dollars 
C) $750; 62,500 dollars 
D) $750; 187,500 dollars 
A) $1,000: 62,500 dollars 
B) $750; 46,875 dollars 
C) $750; 62,500 dollars 
D) $750; 187,500 dollars

Question 14

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 15

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 16

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

Accepted Answer

A) Minimize expected return and focus more on variability 
B) Maximize expected return and focus less on variability 
C) Have equal concern for expected return and variability 
D) Be more risk-averse 
A) Minimize expected return and focus more on variability 
B) Maximize expected return and focus less on variability 
C) Have equal concern for expected return and variability 
D) Be more risk-averse

Question 17

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 18

An individual faces two alternatives for an investment.Asset 'A' has the following probability of return schedule:
A.

Accepted Answer

Asset 'B' has a certain return of 10.25%

Question 19

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 20

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

Exam 5: Understanding Risk

If the returns of two assets are perfectly positively correlated, an investor who puts half of his/her savings into each will:

Which of the following statements is true?

Diversification is the principle of:

Explain the rapid rise in popularity of mutual funds.

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

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.

Which of the following statements is correct?

Which of the following is true?

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?

Why isn't it correct to say that people who are risk averse avoid risk?

An investment pays $1000 three quarters of the time, and $0 the remaining time.Its expected value and variance respectively are:

Which of the following statements is false?

Hedging is possible only when investments have:

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

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?

An individual faces two alternatives for an investment.Asset 'A' has the following probability of return schedule: A.

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

Which of the following statements is correct?

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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