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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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%

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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%

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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%

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Chapter 05 - Understanding Risk

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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