Chapter 05 Understanding Risk - Amazon S3
[Pages:40]Chapter 05 - Understanding Risk
Chapter 05 Understanding Risk
Multiple Choice Questions
1. (p. 93) Which of the following would not be included in a definition of risk? a. Risk is a measure of uncertainty B. Risk can always be avoided at no cost c. Risk has a time horizon d. Risk usually involves some future payoff
AACSB: Analytic BLOOMS: Knowledge LOD: 1
2. (p. 93) All other factors held constant, an investment: a. With more risk should offer a lower return and sell for a higher price b. With less risk should sell for a lower price and offer a higher return C. With more risk should sell for a lower price and offer a higher return d. With less risk should sell for a lower price and offer a lower return
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 2
3. (p. 93) Uncertainties that are not quantifiable: a. Are what we define as risk b. Are factored into the price of an asset C. Cannot be priced d. Are benchmarks against which quantifiable risks can be assessed
AACSB: Analytic BLOOMS: Knowledge LOD: 1
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Chapter 05 - Understanding Risk
4. (p. 93) When measuring the risk of an asset: A. There may be 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
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 3
5. (p. 93) Which of the following is true? 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
AACSB: Reflective Thinking BLOOMS: Analysis BLOOMS: Comprehension LOD: 3
6. (p. 93) Inflation presents risk because: 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
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 2
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7. (p. 94) If the probability of an outcome equals one, the outcome: a. Is more likely to occur than the others listed B. Is certain to occur c. Is certain not to occur d. Has unquantifiable risk
AACSB: Analytic BLOOMS: Comprehension LOD: 2
8. (p. 94) If a fair coin is tossed, the probability of coming up with a head or a tail is: a. ? or 50 percent b. Zero C. 1 or 100 percent d. Unquantifiable
AACSB: Analytic BLOOMS: Application LOD: 1
9. (p. 94) If the probability of an outcome is zero, you know: a. The outcome is more likely to occur b. The outcome is certain to occur c. The outcome is less likely to occur D. The outcome will not occur
AACSB: Analytic BLOOMS: Comprehension LOD: 2
10. (p. 95) The expected value of an investment: a. Is what the owner will receive when the investment is sold b. Is the sum of the payoffs C. Is the probability-weighted sum of the possible outcomes d. Cannot be determined in advance
AACSB: Analytic BLOOMS: Knowledge LOD: 1
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Chapter 05 - Understanding Risk
11. (p. 96) If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is: a. $1,250 b. $1,050 C. $1,100 d. $2,200
AACSB: Analytic BLOOMS: Application LOD: 2
12. (p. 95) Another name for the expected value of an investment would be: A. The mean value b. The upper-end value c. The certain value d. The risk-free value
AACSB: Analytic BLOOMS: Knowledge LOD: 1
13. (p. 96) 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: a. $1,433.33 b. $1,550.00 c. $2,800.00 D. $1,600.00
AACSB: Analytic BLOOMS: Application LOD: 3
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14. (p. 96) Suppose that Fly-By-Night Airlines, Inc. has a return of 5% twenty percent of the time and 0% the rest of the time. The expected return from Fly-By-Night is: a. 10% b. 0.1% c. 0.2% D. 1.0%
AACSB: Analytic BLOOMS: Application LOD: 3
15. (p. 97) An investor puts $1,000 into an investment that will return $1,250 one-half of the time and $900 the remainder of the time. The expected return for this investor is: a. $1,075 b. 5.0% C. 7.5% d. 15.0%
AACSB: Analytic BLOOMS: Application LOD: 3
16. (p. 97) An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time; $2,000 one-half of the time, and $1,750 the rest of the time. What is the investor's expected return? a. 12.5% b. $250.00 c. 6.25% D. 3.125%
AACSB: Analytic BLOOMS: Application LOD: 3
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17. (p. 98) If an individual voluntarily purchases insurance on his/her home to protect against a loss due to fire, the individual: 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
AACSB: Reflective Thinking BLOOMS: Application LOD: 3
18. (p. 98) Risk-free investments have rates of return: a. Equal to zero B. With a standard deviation equal to zero c. That are uncertain, but have a certain time horizon d. That exhibit a large spread of potential payoffs
AACSB: Analytic BLOOMS: Knowledge LOD: 2
19. (p. 98) An investment with a large spread between possible payoffs will generally have: a. A low expected return B. A high standard deviation c. A low value at risk d. Both a low expected return and a low value at risk
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 2
20. (p. 98) An investment pays $1,500 half of the time and $500 half of the time. Its expected value and variance respectively are: a. $1,000; 500,000 dollars b. $2,000; 250,000 dollars2 c. $1,000; 250,000 dollars D. $1,000; 250,000 dollars2
AACSB: Analytic BLOOMS: Application LOD: 3
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Chapter 05 - Understanding Risk
21. (p. 99) An investment pays $1,200 a quarter of the time; $1,000 half of the time; and $800 a quarter of the time. Its expected value and variance respectively are: A. $1,000; 20,000 dollars2 b. $1,050; 20,000 dollars c. $1,000; 40,000 dollars2 d. $1,000; 80,000 dollars e. $1,000; 40,000 dollars2
AACSB: Analytic BLOOMS: Application LOD: 3
22. (p. 99) An investment pays $1000 three quarters of the time, and $0 the remaining time. Its expected value and variance respectively are: a. $1,000: 62,500 dollars2 b. $750; 46,875 dollars c. $750; 62,500 dollars D. $750; 187,500 dollars2
AACSB: Analytic BLOOMS: Application LOD: 3
23. (p. 98) The standard deviation is generally more useful than the variance because: 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
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 2
24. (p. 99) Given a choice between two investments with the same expected payoff: A. Most people will choose the one with the lower standard deviation b. Most people will opt for the one with the higher standard deviation c. Most people will be indifferent since the expected payoffs are the same d. Most people will calculate the variance to assess the relative risks of the two choices
AACSB: Reflective Thinking BLOOMS: Comprehension LOD: 2
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Chapter 05 - Understanding Risk
25. (p. 98) An investment will pay $2,000 half of the time and $1,400 half of the time. The standard deviation for this investment is: a. $90,000 B. $300 c. $1,700 d. $30
AACSB: Analytic BLOOMS: Application LOD: 3
26. (p. 98) 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: A. $217.94 b. $1,650 c. $47,500dollars2 D. $217.94
AACSB: Analytic BLOOMS: Application LOD: 3
Use the following to answer questions 27-28: 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
27. (p. 98) Which of the following statements is 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 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
AACSB: Analytic BLOOMS: Analysis LOD: 3
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