Deck 10: Risk Management

Question 1

Which of the following time frames is associated with a long-term horizon?

A)2-7
B)10-20
C)2-4
D)4-10
E)15-35

Answer 1

D

Question 2

Why can investments be viewed as a delivery mechanism?

A)Because they increase the household's risk level
B)Because they help create sufficient assets to fund our goals
C)Because they transform current savings into future spending
D)Because they transform future income into current spending
E)Investments are not viewed as delivery mechanism

Answer 2

B

Question 3

According to the semi-strong form efficient market hypothesis,

A)Looking at current and past information on stock price patterns and the number of shares traded is not useful
B)All publicly available information is incorporated in a stock's price
C)All privately available information is incorporated in a stock's price
D)Both a and b
E)Both a and c

Answer 3

D

Question 4

Which of the following influences one's risk tolerance?

A)Personality
B)Upbringing
C)Type of future cash flows for the household
D)All of the above
E)None of the above

Question 5

If the risk free rate is 5% and the risk premium is 4%,what is the expected rate of return?

A)9%
B)1%
C)14%
D)-1%
E)None of the above

Question 6

Which of the following is the most common measurement of price fluctuations?

A)Variance
B)Mean
C)Standard deviation
D)Correlation
E)None of the above

Question 7

Which of the following factors is not a personal consideration that enters into the asset allocation process?

A)Current available resources
B)Projected future cash flows
C)Taxes
D)Risk neutrality
E)All of the above are personal considerations that enter into the asset allocation process

Question 8

If the sum of dividends is $45,000,gains in principal invested are $2,500,and the original cost is $365,500,what is the holding period return?

A)Approximately 13%
B)Approximately 11.5%
C)Approximately 11%
D)Approximately 10.5%
E)None of the above

Question 9

What is the risk premium?

A)The extra risk that compensates you for the additional amount of return you are taking with a particular security over a completely safe one.
B)The extra return that compensates you for the additional amount of risk you are taking with a particular security over a completely safe one.
C)The extra risk that compensates you for the additional amount of return you are taking with a particular security over the market return.
D)The extra return that compensates you for the additional amount of risk you are taking with a particular security over the market risk.
E)None of the above.

Question 10

Which of the following is the holding period return?

A)Sum of dividends or interest paid - Gains in principal invested)/Original cost
B)Sum of dividends or interest paid + Gains in principal invested)/Original cost
C)Gains in principal invested - Sum of dividends or interest paid)/Original cost
D)Gains in principal invested + Sum of dividends - interest paid)/Original cost
E)None of the above

Question 11

Unsystematic risk is:

A)The risk of overall market factors
B)The risk related to an individual company
C)Given a benchmark value of 1
D)Correlated with market returns
E)None of the above

Question 12

Which of the following is the furthest to the left of the security market line?

A)Government bonds
B)High quality stocks
C)Corporate bonds
D)Risk-free rate
E)None of the above

Question 13

Which of the following is not a step in the planning system for asset allocation?

A)Consider personal factors
B)Identify and review investment alternatives
C)Employ portfolio management principle
D)All of the above are steps in the planning system
E)None of the above is a step in the planning system

Question 14

Which of the following is not part of the investment policy associated with a short-term horizon?

A)Short-term bond funds
B)Money market
C)U.S.government bonds
D)Certificates of deposit
E)All of the above are part of the investment policy associated with a short-term horizon

Question 15

What is liquidity risk?

A)The risk of a decline in the overall stock or bond market
B)The risk of unfavorable business conditions caused by weakness in the overall economy
C)The risk of receiving a lower than market price upon sale of your holding
D)The risk of an unexpected rise in prices that reduces purchasing power
E)None of the above

Question 16

The expected rate of return is equal to:

A)The risk free rate divided by the risk premium
B)The risk free rate minus the risk premium
C)The risk premium minus the risk free rate
D)The risk premium divided by the risk free rate
E)None of the above

Question 17

Normal long-term asset allocation is the investment policy associated with which of the following horizons?

A)Intermediate-term
B)Long-term
C)Very long-term
D)Both a and b
E)Both b and c

Question 18

The risk of unfavorable business conditions caused by weakness in the overall economy is:

A)Market risk
B)Inflation risk
C)Regulatory risk
D)Company risk
E)None of the above

Question 19

How does standard deviation differ from semi-variance?

A)Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in losses
B)Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in gains
C)Semi-variance includes fluctuations that result in both gains and losses while standard deviation only measures fluctuations resulting in losses
D)Semi-variance includes fluctuations that result in both gains and losses while standard deviation only measures fluctuations resulting in gains
E)None of the above

Question 20

Which of the following statements does not characterize the efficient market hypothesis?

A)The best valuation for an individual security is its current market price
B)The price reflects all information known about the security
C)The price is the fair price for the asset
D)When new information is issued,it is quickly incorporated in the price of the shares
E)All of the above characterize the efficient market hypothesis

Question 21

According to which of the following is technical analysis a waste of time?

A)Weak form efficient market hypothesis
B)Semi-strong form efficient market hypothesis
C)Strong form efficient market hypothesis
D)Both a and b
E)All of the above

Question 22

Greater potential returns and greater risk is a characteristic of which of the following?

A)Smaller capitalization companies
B)Medium capitalization companies
C)Larger capitalization companies
D)All of the above
E)None of the above

Question 23

Which of the following is not a reason why bonds are considered safer than most other types of securities?

A)The annual income received is flexible
B)The contracted-for loan principal is likely to be repaid in full at the stated date
C)Should bankruptcy occur,bondholders have priority in receiving the proceeds from liquidation of business assets
D)All of the above are reasons why bonds are considered safer
E)None of the above is a reason why bonds are considered safer

Question 24

Which of the following is not a question that is asked during the performance evaluation?

A)How did I do?
B)What were the reasons for the under or overperformance?
C)What can I do to improve future performance?
D)All of the above
E)Only b and c

Question 25

Which of the following is a weakness associated with mutual funds?

A)Overhead costs
B)Tax
C)Diversification
D)Both a and b
E)Both b and c

Question 26

Which of the following characterizes a defensive stock?

A)The company grows more rapidly in sales and earnings than the overall economy
B)The company is less affected by cyclical business conditions
C)The company grows at average or below-average rates
D)Both a and b
E)Both b and c

Question 27

Which of the following statements regarding ETFs is false?

A)Traditionally actively managed
B)Pool together investors' monies for joint management
C)Traded intraday like stocks
D)Typically lower cost structure than mutual funds
E)Usually traded at close to market value of its underlying holdings

Question 28

A fund that attempts to duplicate market performance and keeps costs low by using computerized programs to purchase holdings is called:

A)An actively managed fund
B)An index fund
C)A high-tech fund
D)A defensive fund
E)A cyclical fund

Question 29

Which of the following is a characteristic of Total Portfolio Management?

A)All household assets interact and their correlations are taken into account
B)Investment decisions that are made incorporate individual asset returns,risks,and the degree to which they are correlated
C)Households make investment decisions based not only on marketable financial securities but on all assets that it possesses
D)All of the above
E)None of the above

Question 30

The fact that records are kept by fund management is:

A)A weakness,as it provides a paper trail that can be used in an audit
B)A strength,as it can provide you with information about performance
C)A weakness,as it is used to justify the management expenses
D)None of the above
E)Both a and c

Question 31

Which of the following best defines mean reversion?

A)Returns for securities tend to move toward higher performance when returns are examined over shorter time frames
B)Returns for securities tend to move toward lower performance when returns are examined over shorter time frames
C)Returns for securities tend to move toward average performance when returns are examined over longer time frames
D)All of the above
E)None of the above