Question 1

The most a risk-averse individual would pay to participate in a flip of a fair coin with a payoff of $500 if the correct outcome is called is:

Accepted Answer

A) $500 
B) An amount less than $250 
C) $250 
D) An amount not to exceed $500 
A) $500 
B) An amount less than $250 
C) $250 
D) An amount not to exceed $500

Question 2

Comparing a lottery where a $1 ticket purchases a chance to win $1 million with another lottery in which a $5,000 ticket purchases a chance to win $5 billion, we notice many people would participate in the first but not the second, even though the odds of winning both lotteries are the same.We can perhaps best explain this outcome by:

Accepted Answer

A) Higher expected value for the lottery paying $1 million 
B) Higher expected value for the lottery paying $5 billion 
C) Lower value at risk for the lottery paying $1 million 
D) Higher value at risk for the lottery paying $1 million 
A) Higher expected value for the lottery paying $1 million 
B) Higher expected value for the lottery paying $5 billion 
C) Lower value at risk for the lottery paying $1 million 
D) Higher value at risk for the lottery paying $1 million

Question 3

A $600 investment has the following payoff frequency: a quarter of the time it will be $0; three quarters of the time it will pay off $1000.Its standard deviation and value at risk respectively are:

Accepted Answer

A) $750; $600 
B) $433; $600 
C) $0; $1000 
D) $433; $1000 
A) $750; $600 
B) $433; $600 
C) $0; $1000 
D) $433; $1000

Question 4

Explain the following: Risk results from the fact that more outcomes could happen than will happen.

Accepted Answer

Risk results from uncertainty, not knowi

Question 5

When the home construction industry does poorly due to a recession, this is an example of:

Accepted Answer

A) Systematic risk 
B) Idiosyncratic risk 
C) Risk premium 
D) Unique risk 
A) Systematic risk 
B) Idiosyncratic risk 
C) Risk premium 
D) Unique risk

Question 6

If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:

Accepted Answer

A) $1,250 
B) $1,050 
C) $1,100 
D) $2,200 
A) $1,250 
B) $1,050 
C) $1,100 
D) $2,200

Question 7

The expected value of an investment:

Accepted Answer

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 
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

Question 8

When measuring the risk of an asset:

Accepted Answer

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 
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

Question 9

Changes in general economic conditions usually produce:

Accepted Answer

A) Systematic risk 
B) Idiosyncratic risk 
C) Risk reduction 
D) Lower risk premiums 
A) Systematic risk 
B) Idiosyncratic risk 
C) Risk reduction 
D) Lower risk premiums

Question 10

The fact that not everyone places all of his/her savings in U.S.Treasury bonds indicates that:

Accepted Answer

A) Most investors are not risk averse 
B) Many investors are actually risk seekers 
C) Even risk-averse people will take risk if they are compensated for it 
D) Most people are risk-neutral 
A) Most investors are not risk averse 
B) Many investors are actually risk seekers 
C) Even risk-averse people will take risk if they are compensated for it 
D) Most people are risk-neutral

Question 11

The risk premium for an investment:

Accepted Answer

A) Is negative for U.S.Treasury Securities 
B) Is a fixed amount added to the risk-free return, regardless of the level of risk 
C) Increases with risk 
D) Is zero (0) for risk-averse investors 
A) Is negative for U.S.Treasury Securities 
B) Is a fixed amount added to the risk-free return, regardless of the level of risk 
C) Increases with risk 
D) Is zero (0) for risk-averse investors

Question 12

Investing in a mutual fund made up of hundreds of stocks of different companies is an example of all of the following except:

Accepted Answer

A) Spreading risk 
B) Diversifying 
C) Risk reduction 
D) Increasing the variance of a portfolio 
A) Spreading risk 
B) Diversifying 
C) Risk reduction 
D) Increasing the variance of a portfolio

Question 13

A portfolio of assets has lower risk than holding one asset, but the same expected return and higher transaction costs.Which of the following statements is most correct?

Accepted Answer

A) The portfolio is attractive to people who are risk-averse and risk-neutral, but not to risk seekers 
B) The portfolio is attractive to investors who are risk-neutral 
C) The portfolio is not attractive to investors who are risk-neutral 
D) The portfolio is attractive to investors who are risk seekers 
A) The portfolio is attractive to people who are risk-averse and risk-neutral, but not to risk seekers 
B) The portfolio is attractive to investors who are risk-neutral 
C) The portfolio is not attractive to investors who are risk-neutral 
D) The portfolio is attractive to investors who are risk seekers

Question 14

All other factors held constant, an investment:

Accepted Answer

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 
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

Question 15

The main reason for diversification for an investor is:

Accepted Answer

A) To take advantage of the fact that returns of assets are perfectly positively correlated 
B) To take advantage of the fact that returns on assets are not perfectly positively correlated 
C) To lower transaction costs 
D) To gain from the greater returns that come from greater risk 
A) To take advantage of the fact that returns of assets are perfectly positively correlated 
B) To take advantage of the fact that returns on assets are not perfectly positively correlated 
C) To lower transaction costs 
D) To gain from the greater returns that come from greater risk

Question 16

Suppose a saver is looking for the opportunity to make a very large return in a very short period of time.Would you recommend diversification for this individual?

Accepted Answer

An individual looking to make a very lar

Question 17

If the probability of an outcome is zero, you know:

Accepted Answer

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 
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

Question 18

We observe an increase in the price for Apple stock, while other Nasdaq-listed companies experience no change in their share prices.The increase in Apple's stock price most likely reflects (with respect to Apple):

Accepted Answer

A) An increase in systematic risk 
B) A decrease in systematic risk 
C) An increase in idiosyncratic risk 
D) A decrease in idiosyncratic risk 
A) An increase in systematic risk 
B) A decrease in systematic risk 
C) An increase in idiosyncratic risk 
D) A decrease in idiosyncratic risk

Question 19

Diversification can eliminate:

Accepted Answer

A) All risk in a portfolio 
B) Risk only if the investor is risk averse 
C) The systematic risk in a portfolio 
D) The idiosyncratic risk in a portfolio 
A) All risk in a portfolio 
B) Risk only if the investor is risk averse 
C) The systematic risk in a portfolio 
D) The idiosyncratic risk in a portfolio

Question 20

Uncertainty associated with the expected rate of return on an individual stock reflects all of the following except:

Accepted Answer

A) Idiosyncratic risk 
B) Changes in the performance of the individual company relative to others 
C) Change in macroeconomic conditions 
D) Systematic risk 
A) Idiosyncratic risk 
B) Changes in the performance of the individual company relative to others 
C) Change in macroeconomic conditions 
D) Systematic risk

Exam 5: Understanding Risk

The most a risk-averse individual would pay to participate in a flip of a fair coin with a payoff of $500 if the correct outcome is called is:

A $600 investment has the following payoff frequency: a quarter of the time it will be $0; three quarters of the time it will pay off $1000.Its standard deviation and value at risk respectively are:

Explain the following: Risk results from the fact that more outcomes could happen than will happen.

When the home construction industry does poorly due to a recession, this is an example of:

If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:

The expected value of an investment:

When measuring the risk of an asset:

Changes in general economic conditions usually produce:

The fact that not everyone places all of his/her savings in U.S.Treasury bonds indicates that:

The risk premium for an investment:

Investing in a mutual fund made up of hundreds of stocks of different companies is an example of all of the following except:

A portfolio of assets has lower risk than holding one asset, but the same expected return and higher transaction costs.Which of the following statements is most correct?

All other factors held constant, an investment:

The main reason for diversification for an investor is:

Suppose a saver is looking for the opportunity to make a very large return in a very short period of time.Would you recommend diversification for this individual?

If the probability of an outcome is zero, you know:

We observe an increase in the price for Apple stock, while other Nasdaq-listed companies experience no change in their share prices.The increase in Apple's stock price most likely reflects (with respect to Apple):

Diversification can eliminate:

Uncertainty associated with the expected rate of return on an individual stock reflects all of the following except:

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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