Question 1

Assets with zero covariance have yields that are

Accepted Answer

A)  inversely related. 
B)  positively correlated. 
C)  negatively correlated. 
D)  independent. 
A)  inversely related. 
B)  positively correlated. 
C)  negatively correlated. 
D)  independent. D

Question 2

A potential drawback of using the standard deviation to measure risk is that

Accepted Answer

A)  positive and negative deviations from the mean cancel each other out. 
B)  both positive and negative deviations are included to compute deviations around the mean. 
C)  the probability distribution of returns is symmetrical. 
D)  None of the above. 
A)  positive and negative deviations from the mean cancel each other out. 
B)  both positive and negative deviations are included to compute deviations around the mean. 
C)  the probability distribution of returns is symmetrical. 
D)  None of the above. B

Question 3

If asset A is a risky asset yielding 10 percent and asset B is a riskless asset with the same maturity with a yield of 8 percent, investors would

Accepted Answer

A)  prefer asset A. 
B)  prefer asset B. 
C)  be indifferent between the two assets. 
D)  None of the above. 
A)  prefer asset A. 
B)  prefer asset B. 
C)  be indifferent between the two assets. 
D)  None of the above. D

Question 4

The standard deviation around an expected value is a useful measure of

Accepted Answer

A)  expected value of an asset. 
B)  economic value of an asset. 
C)  the difference between the best-case return of an asset and its worst-case return. 
D)  deviation of an asset's actual returns from its expected returns. 
A)  expected value of an asset. 
B)  economic value of an asset. 
C)  the difference between the best-case return of an asset and its worst-case return. 
D)  deviation of an asset's actual returns from its expected returns.

Question 5

The expected yield on an asset with two possible outcomes is equal to the

Accepted Answer

A)  difference between the two outcomes. 
B)  sum of the possible outcomes multiplied by their respective probabilities. 
C)  standard deviation of the two outcomes. 
D)  product of the two outcomes. 
A)  difference between the two outcomes. 
B)  sum of the possible outcomes multiplied by their respective probabilities. 
C)  standard deviation of the two outcomes. 
D)  product of the two outcomes.

Question 6

A mutual fund that purchases a wide variety of stocks will

Accepted Answer

A)  eliminate systematic risk. 
B)  minimize nonsystematic risk. 
C)  minimize market risk. 
D)  minimize default risk. 
A)  eliminate systematic risk. 
B)  minimize nonsystematic risk. 
C)  minimize market risk. 
D)  minimize default risk.

Question 7

We can be more confident that standard deviation is a good measure of the risk of an asset (held in isolation)when

Accepted Answer

A)  the number of different possible returns on the asset rises. 
B)  the probabilities attached to the possible returns on the asset are less equal. 
C)  the possible returns on the asset are distributed symmetrically around the mean. 
D)  the asset has a longer maturity. 
A)  the number of different possible returns on the asset rises. 
B)  the probabilities attached to the possible returns on the asset are less equal. 
C)  the possible returns on the asset are distributed symmetrically around the mean. 
D)  the asset has a longer maturity.

Question 8

Most people are

Accepted Answer

A)  risk lovers. 
B)  risk-averse. 
C)  indifferent toward risk. 
D)  None of the above. 
A)  risk lovers. 
B)  risk-averse. 
C)  indifferent toward risk. 
D)  None of the above.

Question 9

Empirical evidence indicates that security returns have

Accepted Answer

A)  greater probability of exceeding expected value yields. 
B)  greater probability of yielding below expected value returns. 
C)  a symmetrical probability distribution. 
D)  a probability distribution that cannot be measured. 
A)  greater probability of exceeding expected value yields. 
B)  greater probability of yielding below expected value returns. 
C)  a symmetrical probability distribution. 
D)  a probability distribution that cannot be measured.

Question 10

Assume an asset has a 50 percent probability of yielding 10 percent and an equal probability of yielding 6 percent. The standard deviation for this asset is

Accepted Answer

A)  10 percent. 
B)  8 percent. 
C)  6 percent. 
D)  2 percent. 
A)  10 percent. 
B)  8 percent. 
C)  6 percent. 
D)  2 percent.

Question 11

In a world of certainty, the key decisions influenced by the riskless interest rate are

Accepted Answer

A)  risk premiums demanded by investors. 
B)  portfolio decisions. 
C)  diversification decisions. 
D)  consumption versus saving decisions. 
A)  risk premiums demanded by investors. 
B)  portfolio decisions. 
C)  diversification decisions. 
D)  consumption versus saving decisions.

Question 12

Modern portfolio analysis assumes that individuals

Accepted Answer

A)  are risk-averse. 
B)  attempt to maximize liquidity. 
C)  attempt to maximize returns regardless of risk. 
D)  never take risks. 
A)  are risk-averse. 
B)  attempt to maximize liquidity. 
C)  attempt to maximize returns regardless of risk. 
D)  never take risks.

Question 13

If two risky assets, A and B, have negative correlation, then when A's yield increases

Accepted Answer

A)  B's yield increases. 
B)  B's yield decreases. 
C)  B's yield can increase or decrease. 
D)  There is not enough information to determine what B's yield will do. 
A)  B's yield increases. 
B)  B's yield decreases. 
C)  B's yield can increase or decrease. 
D)  There is not enough information to determine what B's yield will do.

Question 14

Assume a portfolio in which there is equal investment in two assets that are perfectly negatively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B. The expected yield on this portfolio is

Accepted Answer

A)  8 percent. 
B)  7 percent. 
C)  6 percent. 
D)  5 percent. 
A)  8 percent. 
B)  7 percent. 
C)  6 percent. 
D)  5 percent.

Question 15

In a world of certainty, the interest rate reflects

Accepted Answer

A)  the degree of risk. 
B)  differing time patterns of individuals' consumption preferences. 
C)  economic growth. 
D)  qualifications of borrowers. 
A)  the degree of risk. 
B)  differing time patterns of individuals' consumption preferences. 
C)  economic growth. 
D)  qualifications of borrowers.

Question 16

Assume a portfolio in which there is equal investment in two assets that are perfectly positively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B. The expected yield on this portfolio is

Accepted Answer

A)  8 percent. 
B)  7 percent. 
C)  6 percent. 
D)  5 percent. 
A)  8 percent. 
B)  7 percent. 
C)  6 percent. 
D)  5 percent.

Question 17

The risk premium that risk averse investors will demand on a security will be in proportion to the __________ of the portfolio.

Accepted Answer

A)  systematic risk 
B)  nonsystematic risk 
C)  risk of the worst case return 
D)  diversification 
A)  systematic risk 
B)  nonsystematic risk 
C)  risk of the worst case return 
D)  diversification

Question 18

Holding a group of assets reduces risk relative to holding a single asset as long as the assets

Accepted Answer

A)  are dependent on each other. 
B)  are positively correlated. 
C)  are uncorrelated. 
D)  do not have precisely the same pattern of returns. 
A)  are dependent on each other. 
B)  are positively correlated. 
C)  are uncorrelated. 
D)  do not have precisely the same pattern of returns.

Question 19

If an investor holds two risky assets with a perfect negative correlation, then risk

Accepted Answer

A)  falls to zero. 
B)  is increased. 
C)  is unaffected. 
D)  is reduced by 50 percent. 
A)  falls to zero. 
B)  is increased. 
C)  is unaffected. 
D)  is reduced by 50 percent.

Question 20

If the interest rate on a security consists only of the riskless rate, then

Accepted Answer

A)  there is no uncertainty. 
B)  velocity is constant. 
C)  the money supply is fixed. 
D)  the price level is fixed. 
A)  there is no uncertainty. 
B)  velocity is constant. 
C)  the money supply is fixed. 
D)  the price level is fixed.

Exam 7: The Pricing of Risky Financial Assets

Assets with zero covariance have yields that are

A potential drawback of using the standard deviation to measure risk is that

If asset A is a risky asset yielding 10 percent and asset B is a riskless asset with the same maturity with a yield of 8 percent, investors would

The standard deviation around an expected value is a useful measure of

The expected yield on an asset with two possible outcomes is equal to the

A mutual fund that purchases a wide variety of stocks will

We can be more confident that standard deviation is a good measure of the risk of an asset (held in isolation)when

Most people are

Empirical evidence indicates that security returns have

Assume an asset has a 50 percent probability of yielding 10 percent and an equal probability of yielding 6 percent. The standard deviation for this asset is

In a world of certainty, the key decisions influenced by the riskless interest rate are

Modern portfolio analysis assumes that individuals

If two risky assets, A and B, have negative correlation, then when A's yield increases

Assume a portfolio in which there is equal investment in two assets that are perfectly negatively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B. The expected yield on this portfolio is

In a world of certainty, the interest rate reflects

Assume a portfolio in which there is equal investment in two assets that are perfectly positively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B. The expected yield on this portfolio is

The risk premium that risk averse investors will demand on a security will be in proportion to the __________ of the portfolio.

Holding a group of assets reduces risk relative to holding a single asset as long as the assets

If an investor holds two risky assets with a perfect negative correlation, then risk

If the interest rate on a security consists only of the riskless rate, then

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

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