Question 1

What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and tails pays zero?

Accepted Answer

The expected value of this event is calc...

Question 2

An investment will pay $2,000 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

Question 3

The measure of risk that focuses on the worst possible outcome is called:

Accepted Answer

A)   expected rate of return.
B)   risk-free rate of return.
C)   standard deviation of return.
D)   value at risk.

Question 4

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.

Question 5

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.

Question 6

Briefly explain the difference between idiosyncratic risk and systematic risk. Provide an example of each.

Accepted Answer

Systematic risk is risk resulting from s...

Question 7

What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?

Accepted Answer

We can use the general formula:
Leverage...

Question 8

Explain the rapid rise in popularity of mutual funds.

Accepted Answer

The chapter covered the topic of spreadi...

Question 9

A risk-averse investor compared to a risk-neutral investor would:

Accepted Answer

A)   offer the same price for an investment as the risk-neutral investor.
B)   require a higher risk premium for the same investment as a risk-neutral investor.
C)   place more focus on expected return and less on return than the risk-neutral investor.
D)   place less focus on expected return than the risk-neutral investor.

Question 10

An individual faces two alternatives for an investment. Asset 'A' has the following probability of return schedule:
  
Asset 'B' has a certain return of 10.25%. If this individual selects asset 'A' does it imply she is risk averse? Explain.

Accepted Answer

Since both assets provide the same expec...

Question 11

Calculate the expected value, the expected return, the variance and the standard deviation of an asset that requires a $1000 investment, but will return $850 half of the time and $1,250 the other half of the time.

Accepted Answer

Expected value is = 0.5($850) + 0.5($1,2...

Question 12

A risk-averse investor versus a risk-neutral investor:

Accepted Answer

A)   will never take a risk, while the risk neutral investor will.
B)   needs greater compensation for the same risk versus the risk neutral investor.
C)   will take the same risks as the risk neutral investor if the expected returns are equal.
D)   needs less compensation for the same risk versus the risk neutral investor.

Question 13

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.

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 expected return.
C)   with more risk should sell for a lower price and offer a higher expected return.
D)   with less risk should sell for a lower price and offer a lower return.

Question 15

An automobile insurance company on average charges a premium that:

Accepted Answer

A)   equals the expected loss from each driver.
B)   is less than the expected loss from each driver.
C)   is greater than the expected loss from each driver.
D)   equals 1/(expected loss)  of each driver.

Question 16

Identify at least three possible sources for a risk an individual may face in planning for retirement.

Accepted Answer

In planning for retirement an individual...

Question 17

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.

Question 18

What would be the standard deviation for a $1,000 risk-free asset that returns $1,100?

Accepted Answer

The standard deviation for this asset wo...

Question 19

Unique risk is another name for:

Accepted Answer

A)   market risk.
B)   systematic risk.
C)   the risk premium.
D)   idiosyncratic risk.

Question 20

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

Accepted Answer

Risk results from uncertainty, not knowi...

Exam 5: Understanding Risk

An investment will pay $2,000 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:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedRisk results from uncertainty, not knowi...View AnswerShow Answer

What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?

Correct AnswerverifiedWe can use the general formula:Leverage...View AnswerShow Answer

An individual faces two alternatives for an investment. Asset 'A' has the following probability of return schedule: Asset 'B' has a certain return of 10.25%. If this individual selects asset 'A' does it imply she is risk averse? Explain.

Correct AnswerverifiedSince both assets provide the same expec...View AnswerShow Answer

Explain the rapid rise in popularity of mutual funds.

Correct AnswerverifiedThe chapter covered the topic of spreadi...View AnswerShow Answer

A risk-averse investor versus a risk-neutral investor:

Correct AnswerverifiedShow Answer

Diversification can eliminate:

Correct AnswerverifiedShow Answer

An automobile insurance company on average charges a premium that:

Correct AnswerverifiedShow Answer

The measure of risk that focuses on the worst possible outcome is called:

Correct AnswerverifiedShow Answer

What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and tails pays zero?

Correct AnswerverifiedThe expected value of this event is calc...View AnswerShow Answer

What would be the standard deviation for a $1,000 risk-free asset that returns $1,100?

Correct AnswerverifiedThe standard deviation for this asset wo...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

A risk-averse investor will:

Correct AnswerverifiedShow Answer

Unique risk is another name for:

Correct AnswerverifiedShow Answer

A risk-averse investor compared to a risk-neutral investor would:

Correct AnswerverifiedShow Answer

Calculate the expected value, the expected return, the variance and the standard deviation of an asset that requires a $1000 investment, but will return $850 half of the time and $1,250 the other half of the time.

Correct AnswerverifiedExpected value is = 0.5($850) + 0.5($1,2...View AnswerShow Answer

All other factors held constant, an investment:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Briefly explain the difference between idiosyncratic risk and systematic risk. Provide an example of each.

Correct AnswerverifiedSystematic risk is risk resulting from s...View AnswerShow Answer

Identify at least three possible sources for a risk an individual may face in planning for retirement.

Correct AnswerverifiedIn planning for retirement an individual...View AnswerShow Answer

Correct Answer
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Correct Answer
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Risk results from uncertainty, not knowi...
View Answer

Correct Answer
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We can use the general formula:
Leverage...
View Answer

Correct Answer
verified
Since both assets provide the same expec...
View Answer

Correct Answer
verified
The chapter covered the topic of spreadi...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The expected value of this event is calc...
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Correct Answer
verified
The standard deviation for this asset wo...
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Expected value is = 0.5($850) + 0.5($1,2...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Systematic risk is risk resulting from s...
View Answer

Correct Answer
verified
In planning for retirement an individual...
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