Question 1

An investor practicing hedging would be most likely to:

Accepted Answer

A) Avoid the stock market and focus on bonds 
B) Purchase shares in General Motors and buy U.S.Treasury Bonds 
C) Purchase shares in General Motors and Amoco Oil 
D) Put his/her invested funds in CDs 
A) Avoid the stock market and focus on bonds 
B) Purchase shares in General Motors and buy U.S.Treasury Bonds 
C) Purchase shares in General Motors and Amoco Oil 
D) Put his/her invested funds in CDs

Question 2

Explain why returns on assets compensate for systematic risk but not for idiosyncratic risk.

Accepted Answer

Idiosyncratic risk can be redu

Question 3

The Russian wheat crop fails, driving up wheat prices in the U.S.This is an example of:

Accepted Answer

A) Idiosyncratic risk 
B) Diversification 
C) Systematic risk 
D) Quantifiable risk 
A) Idiosyncratic risk 
B) Diversification 
C) Systematic risk 
D) Quantifiable risk

Question 4

The variance of a portfolio containing n assets:

Accepted Answer

A) Increases as n increases 
B) Decreases as n increases 
C) Is constant for any n greater than two 
D) Does not change in a predictable way when n increases 
A) Increases as n increases 
B) Decreases as n increases 
C) Is constant for any n greater than two 
D) Does not change in a predictable way when n increases

Question 5

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

Question 6

Professional gamblers know that the odds are always in favor of the house (casinos).The fact that they gamble says they are:

Accepted Answer

A) Irrational 
B) Risk-neutral 
C) Risk-averse 
D) Risk seekers 
A) Irrational 
B) Risk-neutral 
C) Risk-averse 
D) Risk seekers

Question 7

An individual owns a $100,000 home.She determine that her chances of suffering a fire in any given year to be 1/1000 (0.001).She correctly calculates her expected loss in any year to be $100.Explain why this really isn't a good way to measure her potential for loss.

Accepted Answer

While all of her calculations may be acc

Question 8

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

Since asset B has a

Question 9

Another name for the expected value of an investment would be:

Accepted Answer

A) The mean value 
B) The upper-end value 
C) The certain value 
D) The risk-free value 
A) The mean value 
B) The upper-end value 
C) The certain value 
D) The risk-free value

Question 10

The standard deviation is generally more useful than the variance because:

Accepted Answer

A) It is easier to calculate 
B) Variance is a measure of risk, where standard deviation is a measure of return 
C) Standard deviation is calculated in the same units as payoffs and variance isn't 
D) It can measure unquantifiable risk 
A) It is easier to calculate 
B) Variance is a measure of risk, where standard deviation is a measure of return 
C) Standard deviation is calculated in the same units as payoffs and variance isn't 
D) It can measure unquantifiable risk

Question 11

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

Accepted Answer

Asset B has a certain return of 8.0%.If

Question 12

If an investment has a 20% (0.20) probability of returning $1,000; a 30% (0.30) probability of returning $1,500; and a 50% (0.50) probability of returning $1,800; the expected value of the investment is:

Accepted Answer

A) $1,433.33 
B) $1,550.00 
C) $2,800.00 
D) $1,600.00 
A) $1,433.33 
B) $1,550.00 
C) $2,800.00 
D) $1,600.00

Question 13

What is the difference between standard deviation and value at risk? Consider the difference between purchasing a one-year bank CD compared with purchasing a homeowner's insurance policy.Which scenario do you believe is more likely to consider value at risk over standard deviation? Explain.

Accepted Answer

Standard deviation measures the uncertai

Question 14

Explain why insurance companies may find themselves at times having to refuse business.

Accepted Answer

Insurance companies accept risk from ind

Question 15

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 16

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 17

Explain why casinos will find professional gamblers participating in the various games of chance even though these professionals know the odds are in favor of the house and against them.

Accepted Answer

Most professional gamblers are aware the

Question 18

A $500 investment has the following payoff frequency: half of the time it will pay $350 and the other half of the time it will pay $900.Its standard deviation and value at risk respectively are:

Accepted Answer

A) $275; $150 
B) $625; $275 
C) $275; $350 
D) $125; $500 
A) $275; $150 
B) $625; $275 
C) $275; $350 
D) $125; $500

Question 19

If an individual voluntarily purchases insurance on his/her home to protect against a loss due to fire, the individual:

Accepted Answer

A) Is convinced a fire will occur 
B) Believes the premium for the policy is less than the expected loss from a fire 
C) Has calculated the probability of a fire to be high 
D) Has underestimated the probability that a fire will occur 
A) Is convinced a fire will occur 
B) Believes the premium for the policy is less than the expected loss from a fire 
C) Has calculated the probability of a fire to be high 
D) Has underestimated the probability that a fire will occur

Exam 5: Understanding Risk

An investor practicing hedging would be most likely to:

Explain why returns on assets compensate for systematic risk but not for idiosyncratic risk.

The Russian wheat crop fails, driving up wheat prices in the U.S.This is an example of:

The variance of a portfolio containing n assets:

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:

Professional gamblers know that the odds are always in favor of the house (casinos).The fact that they gamble says they are:

An individual owns a $100,000 home.She determine that her chances of suffering a fire in any given year to be 1/1000 (0.001).She correctly calculates her expected loss in any year to be $100.Explain why this really isn't a good way to measure her potential for loss.

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?

Another name for the expected value of an investment would be:

The standard deviation is generally more useful than the variance because:

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

If an investment has a 20% (0.20) probability of returning $1,000; a 30% (0.30) probability of returning $1,500; and a 50% (0.50) probability of returning $1,800; the expected value of the investment is:

What is the difference between standard deviation and value at risk? Consider the difference between purchasing a one-year bank CD compared with purchasing a homeowner's insurance policy.Which scenario do you believe is more likely to consider value at risk over standard deviation? Explain.

Explain why insurance companies may find themselves at times having to refuse business.

Inflation presents risk because:

Explain why casinos will find professional gamblers participating in the various games of chance even though these professionals know the odds are in favor of the house and against them.

A $500 investment has the following payoff frequency: half of the time it will pay $350 and the other half of the time it will pay $900.Its standard deviation and value at risk respectively are:

If an individual voluntarily purchases insurance on his/her home to protect against a loss due to fire, the individual:

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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