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| 1 | |
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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| 2 | |
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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| 3 | |
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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| 4 | |
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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| 5 | |
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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| 6 | |
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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| 7 | |
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 dollars |
| | C) | $1,000; 250,000 dollars |
| | D) | $1,000; 250,000 dollars |
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| 8 | |
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 dollars |
| | B) | $750; 46,875 dollars |
| | C) | $750; 62,500 dollars |
| | D) | $750; 187,500 dollars |
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| 9 | |
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) | $2,179 |
| | B) | $1,650 |
| | C) | $47,500 dollars |
| | D) | $217.94 |
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| 10 | |
A risk-averse investor will: |
| | A) | Never prefer an investment with a lower expected return. |
| | B) | Always prefer an investment with a certain return to one with the same expected return but that has any amount of uncertainty. |
| | C) | Always require a certain return. |
| | D) | Always focus exclusively on the expected return. |
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| 11 | |
Professional gamblers know that the odds are always in favor of the house (casinos). The fact that they gamble says they are: |
| | A) | Irrational. |
| | B) | Risk-neutral. |
| | C) | Risk-averse. |
| | D) | Risk seekers. |
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| 12 | |
Idiosyncratic risk: |
| | A) | Affects all firms in the economy. |
| | B) | Affects one or a few firms, not everyone. |
| | C) | Is fixed across all firms. |
| | D) | Impacts all firms in the same industry equally. |
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| 13 | |
Hedging is possible only when investments have: |
| | A) | Opposite payoff patterns. |
| | B) | The same payoff patterns. |
| | C) | Payoffs that are independent of each other. |
| | D) | The same risk premiums. |
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| 14 | |
If an investment offered an expected payoff of $100 with $0 variance, you would know that: |
| | A) | Half of the time the payoff is $100 and the other half it is $0. |
| | B) | The payoff is always $100. |
| | C) | Half of the time the payoff is $200 and the other half it is $0. |
| | D) | Half of the time the payoff is $200 and the other half it is $50. |
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| 15 | |
Spreading risk involves: |
| | A) | Finding assets whose returns are perfectly negatively correlated. |
| | B) | Adding assets to a portfolio that move independently. |
| | C) | Investing in bonds and avoiding stocks during bad times. |
| | D) | Building a portfolio of assets whose returns move together. |
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