Question 1

Portfolio theory was initially developed by:

Accepted Answer

A) Fama (1970). 
B) Markowitz (1952). 
C) Modigliani and Miller (1958). 
D) Sharpe (1950). 
A) Fama (1970). 
B) Markowitz (1952). 
C) Modigliani and Miller (1958). 
D) Sharpe (1950).

Question 2

Which distribution can be fully described by its expected value and standard deviation?

Accepted Answer

A) Normal distribution. 
B) Probability distribution. 
C) Both Normal distribution and Probability distribution. 
D) None of the given options. 
A) Normal distribution. 
B) Probability distribution. 
C) Both Normal distribution and Probability distribution. 
D) None of the given options.

Question 3

Which distribution is a list of the possible dollar returns from the investment together with the probability of each return?

Accepted Answer

A) Normal distribution. 
B) Probability distribution. 
C) Both Normal distribution and Probability distribution. 
D) utility function. 
A) Normal distribution. 
B) Probability distribution. 
C) Both Normal distribution and Probability distribution. 
D) utility function.

Question 4

Which of the following two investments would a risk seeker choose: Investment A with an expected outcome of $1000 and standard deviation of $500,or Investment B with an expected outcome of $1000 and standard deviation of $200?

Accepted Answer

A) Investment A because if Investment B is chosen the expected utility from the increase in spread of expected returns below $1000 outweighs the expected utility from the increase in spread of expected returns above $1000. 
B) Investment A because it offers the chance of more wealth. 
C) Investment A because the downside risk is greater. 
D) Investment B because the downside risk is less. 
A) Investment A because if Investment B is chosen the expected utility from the increase in spread of expected returns below $1000 outweighs the expected utility from the increase in spread of expected returns above $1000. 
B) Investment A because it offers the chance of more wealth. 
C) Investment A because the downside risk is greater. 
D) Investment B because the downside risk is less.

Question 5

Assume two securities A and B.The correlation coefficient between these two securities can be written as:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 6

Systematic risk represents:

Accepted Answer

A) diversifiable risk. 
B) risk that is unavoidable. 
C) risk that is diversifiable. 
D) none of the options given. 
A) diversifiable risk. 
B) risk that is unavoidable. 
C) risk that is diversifiable. 
D) none of the options given.

Question 7

The benefit of diversification to an investor is the reduction of:

Accepted Answer

A) brokerage costs. 
B) brokerage costs and risk. 
C) risk. 
D) research time. 
A) brokerage costs. 
B) brokerage costs and risk. 
C) risk. 
D) research time.

Question 8

Suppose that the returns on an investment are normally distributed with an expected return of 8% and standard deviation of 4%.What is the likelihood of making a negative return? (Hint: the area under a curve for 1 std dev is 34.13%,2 std dev is 47.73% and 3 std dev is 49.87%).

Accepted Answer

A) 47.73% 
B) 34.13% 
C) 15.87% 
D) 2.27% 
A) 47.73% 
B) 34.13% 
C) 15.87% 
D) 2.27%

Question 9

The relationship between the required rate of return for a security and market risk is:

Accepted Answer

A) non-linear. 
B) linear. 
C) denoted by the capital market line. 
D) concave. 
A) non-linear. 
B) linear. 
C) denoted by the capital market line. 
D) concave.

Question 10

Which of the following is not an example of unsystematic risk?

Accepted Answer

A) Changes in the level of interest rates. 
B) The chief executive officer resigns. 
C) A legal suit against a company for environmental pollution. 
D) The development of a new product line. 
A) Changes in the level of interest rates. 
B) The chief executive officer resigns. 
C) A legal suit against a company for environmental pollution. 
D) The development of a new product line.

Question 11

The _____________________ plots the relationship between the expected return and beta of a security.

Accepted Answer

security m

Question 12

After adjusting for risk,the returns to a portfolio can differ from the benchmark portfolio as a result of:

Accepted Answer

A) asset allocation. 
B) market timing. 
C) random events. 
D) all of the given answers. 
A) asset allocation. 
B) market timing. 
C) random events. 
D) all of the given answers.

Question 13

Portfolio theory,as initially developed by Markowitz (1952),assumes that the returns from investments are normally distributed.

Accepted Answer

A) True 
 B)False

Question 14

Which type of risk is unique to a firm and may be eliminated by diversification?

Accepted Answer

A) Macro risk. 
B) Unsystematic risk. 
C) Systematic risk. 
D) Total risk. 
A) Macro risk. 
B) Unsystematic risk. 
C) Systematic risk. 
D) Total risk.

Question 15

Examine the following probability distribution:  
The range and standard deviation of the distribution are:

Accepted Answer

A) $4000 and $1095.45,respectively. 
B) $1095.45 and $4000,respectively. 
C) $5000 and $1095.45,respectively. 
D) $4000 and $2000,respectively. 
A) $4000 and $1095.45,respectively. 
B) $1095.45 and $4000,respectively. 
C) $5000 and $1095.45,respectively. 
D) $4000 and $2000,respectively.

Question 16

Which of the following is typically used in empirical studies as a proxy for the market portfolio?

Accepted Answer

A) Consumer price index. 
B) All Ordinaries Accumulation Index. 
C) Treasury notes. 
D) GDP. 
A) Consumer price index. 
B) All Ordinaries Accumulation Index. 
C) Treasury notes. 
D) GDP.

Question 17

Examine the following probability distribution:  
The expected value from this is:

Accepted Answer

A) $3500 
B) $4000 
C) $3000 
D) $2500 
A) $3500 
B) $4000 
C) $3000 
D) $2500

Question 18

Risk aversion implies that:

Accepted Answer

A) an investor will prefer a higher expected return than a lower expected return. 
B) an investor will refuse to bear any risk at all. 
C) an investor will tolerate extra risk if it is expected that the return will compensate them for bearing it. 
D) an investor will be indifferent to the level of risk providing that the expected return is identical. 
A) an investor will prefer a higher expected return than a lower expected return. 
B) an investor will refuse to bear any risk at all. 
C) an investor will tolerate extra risk if it is expected that the return will compensate them for bearing it. 
D) an investor will be indifferent to the level of risk providing that the expected return is identical.

Question 19

Which investor attaches decreasing utility to each increment in wealth?

Accepted Answer

A) A risk-seeking investor. 
B) A risk-neutral investor. 
C) A risk-averse investor. 
D) All of the given options. 
A) A risk-seeking investor. 
B) A risk-neutral investor. 
C) A risk-averse investor. 
D) All of the given options.

Question 20

Standard deviation is measured as the _______________ of variance.

Accepted Answer

The answer of Standard deviation is measured as the _______________...

Exam 7: Risk and Return

Portfolio theory was initially developed by:

Which distribution can be fully described by its expected value and standard deviation?

Which distribution is a list of the possible dollar returns from the investment together with the probability of each return?

Which of the following two investments would a risk seeker choose: Investment A with an expected outcome of $1000 and standard deviation of $500,or Investment B with an expected outcome of $1000 and standard deviation of $200?

Assume two securities A and B.The correlation coefficient between these two securities can be written as:

Systematic risk represents:

The benefit of diversification to an investor is the reduction of:

Suppose that the returns on an investment are normally distributed with an expected return of 8% and standard deviation of 4%.What is the likelihood of making a negative return? (Hint: the area under a curve for 1 std dev is 34.13%,2 std dev is 47.73% and 3 std dev is 49.87%).

The relationship between the required rate of return for a security and market risk is:

Which of the following is not an example of unsystematic risk?

The _____________________ plots the relationship between the expected return and beta of a security.

After adjusting for risk,the returns to a portfolio can differ from the benchmark portfolio as a result of:

Portfolio theory,as initially developed by Markowitz (1952),assumes that the returns from investments are normally distributed.

Which type of risk is unique to a firm and may be eliminated by diversification?

Examine the following probability distribution: The range and standard deviation of the distribution are:

Which of the following is typically used in empirical studies as a proxy for the market portfolio?

Examine the following probability distribution: The expected value from this is:

Risk aversion implies that:

Which investor attaches decreasing utility to each increment in wealth?

Standard deviation is measured as the _______________ of variance.

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Applying the Time Value of Money to Security Valuation

Project Evaluation: Principles and Methods

The Application of Project Evaluation Methods

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Payout Policy

Principles of Capital Structure

Capital Structure Decisions

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Options and Contingent Claims

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

Filters