Question 1

What is the probability of tossing a pair of dice once and getting a 1? How about a 7?

Accepted Answer

It is impossible to toss two dice and ge

Question 2

The greater the standard deviation of an investment:

Accepted Answer

A) The lower the return 
B) The greater the risk 
C) The lower the risk 
D) The greater the return 
A) The lower the return 
B) The greater the risk 
C) The lower the risk 
D) The greater the return

Question 3

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:

Accepted Answer

A) $600 
B) $1,650 
C) $47,500 
D) $217.94 
A) $600 
B) $1,650 
C) $47,500 
D) $217.94

Question 4

A risk-averse investor will:

Accepted Answer

A) Always accept a greater risk with a greater expected return 
B) Only invest in assets providing certain returns 
C) Never accept lower risk if it means accepting a lower expected return 
D) Sometimes accept a lower expected return if it means less risk 
A) Always accept a greater risk with a greater expected return 
B) Only invest in assets providing certain returns 
C) Never accept lower risk if it means accepting a lower expected return 
D) Sometimes accept a lower expected return if it means less risk

Question 5

When considering different investments, a risk-averse investor is most likely to focus on purchasing:

Accepted Answer

A) Investments with the greatest spread in the expected rate of return 
B) Investments that offer the lowest standard deviation in the investments' expected rates of return for any given expected rate of return 
C) Only risk-free investments 
D) Investments with the lowest risk premium, regardless of the expected rate of return 
A) Investments with the greatest spread in the expected rate of return 
B) Investments that offer the lowest standard deviation in the investments' expected rates of return for any given expected rate of return 
C) Only risk-free investments 
D) Investments with the lowest risk premium, regardless of the expected rate of return

Question 6

Given a choice between two investments with the same expected payoff:

Accepted Answer

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 
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

Question 7

Compute the expected return, standard deviation, and value at risk for each of the following investments:
Investment (A): Pays $800 three-fourths of the time and a $1200 loss otherwise.
Investment (B): Pays $1000 loss half of the time and a $1600 gain otherwise.
State which investment will be preferred by each of the following investors, and briefly explain why.
(i) a risk-neutral investor.
(ii) an investor who seeks to avoid the worst-case scenario.
(iii) a risk-averse investor.

Accepted Answer

Investment @#LAT-DLM&
Expected return @#LAT-DLM&
Standard De

Question 8

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:

Accepted Answer

A) 10% 
B) 0.1% 
C) 0.2% 
D) 1.0% 
A) 10% 
B) 0.1% 
C) 0.2% 
D) 1.0%

Question 9

If an investment offered an expected payoff of $100 with $0 variance, you would know that:

Accepted Answer

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 
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

Question 10

An individual who is risk-averse:

Accepted Answer

A) Never takes risks 
B) Accepts risk but only when the expected return is very small 
C) Requires larger compensation when the risk increases 
D) Will accept a lower return as risk rises 
A) Never takes risks 
B) Accepts risk but only when the expected return is very small 
C) Requires larger compensation when the risk increases 
D) Will accept a lower return as risk rises

Question 11

Risk-free investments have rates of return:

Accepted Answer

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 
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

Question 12

Which of the following statements is most correct?

Accepted Answer

A) Usually higher expected returns are associated with higher risk premiums 
B) Usually higher risk premiums are associated with lower expected returns 
C) Usually lower expected returns are associated with higher risk premiums 
D) Usually expected returns are not associated with risk premiums 
A) Usually higher expected returns are associated with higher risk premiums 
B) Usually higher risk premiums are associated with lower expected returns 
C) Usually lower expected returns are associated with higher risk premiums 
D) Usually expected returns are not associated with risk premiums

Question 13

You do some research and find for a driver of your age and gender the probability of having an accident that results in damage to your automobile exceeding $100 is 1/10 per year.Your auto insurance company will reduce your annual premium by $40 if you will increase your collision deductible from $100 to $250.Should you? Explain.
E.L.= 0.1($150) + 0.9($0) = $15.00.Since this expected loss is less than the $40 in premium savings it makes good sense to increase the deductible.

Accepted Answer

An increase of a deductible from $100 to

Question 14

Which of the following statements is true?

Accepted Answer

A) Leverage increases expected return and increases risk 
B) Leverage increases expected return and reduces risk 
C) Leverage decreases expected return but has no effect on risk 
D) Leverage decreases expected return and increases risk 
A) Leverage increases expected return and increases risk 
B) Leverage increases expected return and reduces risk 
C) Leverage decreases expected return but has no effect on risk 
D) Leverage decreases expected return and increases risk

Question 15

Hedging risk and spreading risk are two ways to:

Accepted Answer

A) Increase expected returns from a portfolio 
B) Diversify a portfolio 
C) Lower transaction costs 
D) Match up perfectly positively correlated assets 
A) Increase expected returns from a portfolio 
B) Diversify a portfolio 
C) Lower transaction costs 
D) Match up perfectly positively correlated assets

Question 16

The variance of a portfolio of assets:

Accepted Answer

A) Decreases as the number of assets increases 
B) Increases as the number of assets increases 
C) Approaches 0 as the number of assets decreases 
D) Approaches 1 as the number of assets increases 
A) Decreases as the number of assets increases 
B) Increases as the number of assets increases 
C) Approaches 0 as the number of assets decreases 
D) Approaches 1 as the number of assets increases

Question 17

An investment will pay $2,000 half of the time and $1,400 half of the time.The standard deviation for this investment is:

Accepted Answer

A) $90,000 
B) $300 
C) $1,700 
D) $30 
A) $90,000 
B) $300 
C) $1,700 
D) $30

Question 18

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:

Accepted Answer

A) $1,075 
B) 5.0% 
C) 7.5% 
D) 15.0% 
A) $1,075 
B) 5.0% 
C) 7.5% 
D) 15.0%

Question 19

If ABC Inc.and XYZ Inc.have returns that are perfectly positively correlated:

Accepted Answer

A) Adding XYZ Inc to a portfolio that consists of only ABC Inc.will reduce risk. 
B) Adding ABC Inc to a portfolio that includes only XYZ Inc.will increase risk. 
C) Adding XYZ Inc.to a portfolio that consists of only ABC Inc.will neither increase nor decrease the risk of the portfolio. 
D) Adding XYZ Inc to a portfolio that consists of only ABC Inc.will neither increase nor decrease idiosyncratic risk but will lower systematic risk. 
A) Adding XYZ Inc to a portfolio that consists of only ABC Inc.will reduce risk. 
B) Adding ABC Inc to a portfolio that includes only XYZ Inc.will increase risk. 
C) Adding XYZ Inc.to a portfolio that consists of only ABC Inc.will neither increase nor decrease the risk of the portfolio. 
D) Adding XYZ Inc to a portfolio that consists of only ABC Inc.will neither increase nor decrease idiosyncratic risk but will lower systematic risk.

Question 20

If a fair coin is tossed, the probability of coming up with a head or a tail is:

Accepted Answer

A) ½ or 50 percent 
B) Zero 
C) 1 or 100 percent 
D) Unquantifiable 
A) ½ or 50 percent 
B) Zero 
C) 1 or 100 percent 
D) Unquantifiable

Exam 5: Understanding Risk

What is the probability of tossing a pair of dice once and getting a 1? How about a 7?

The greater the standard deviation of an investment:

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 risk-averse investor will:

When considering different investments, a risk-averse investor is most likely to focus on purchasing:

Given a choice between two investments with the same expected payoff:

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:

If an investment offered an expected payoff of $100 with $0 variance, you would know that:

An individual who is risk-averse:

Risk-free investments have rates of return:

Which of the following statements is most correct?

Which of the following statements is true?

Hedging risk and spreading risk are two ways to:

The variance of a portfolio of assets:

An investment will pay $2,000 half of the time and $1,400 half of the time.The standard deviation for this investment is:

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:

If ABC Inc.and XYZ Inc.have returns that are perfectly positively correlated:

If a fair coin is tossed, the probability of coming up with a head or a tail is:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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