Question 1

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 2

An investment with a large spread between possible payoffs will generally have:

Accepted Answer

A)  a low expected return.
B)  a high standard deviation.
C)  a low value at risk.
D)  both a low expected return and a low value at risk.

Question 3

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.

Question 4

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 5

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 6

Explain why a riskier asset offers a higher expected return.

Accepted Answer

Due to the higher risk, savers...

Question 7

An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time; $2,000 one-half of the time, and $1,750 the rest of the time.What is the investor's expected return?

Accepted Answer

A)  12.5%
B)  $250.00
C)  6.25%
D)  3.125%

Question 8

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 9

An investor practicing hedging would be most likely to:

Accepted Answer

A)  avoid the stock market and focus on bonds.
B)  purchase shares in general motors and buy U.S.treasury bonds.
C)  purchase shares in general motors and Amoco oil.
D)  put his/her invested funds in CDs.

Question 10

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 11

Explain why returns on assets compensate for systematic risk but not for idiosyncratic risk.

Accepted Answer

Idiosyncratic risk can be redu...

Question 12

Explain why insurance companies may find themselves at times having to refuse business.

Accepted Answer

Insurance companies accept risk from ind...

Question 13

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.

Question 14

Calculate the expected value of an investment that has the following payoff frequency: a quarter of the time it will pay $2,000, half of the time it will pay $1,000 and the remaining time it will pay $0.

Accepted Answer

The expected value =...

Question 15

Another name for the expected value of an investment would be the:

Accepted Answer

A)  mean value.
B)  upper-end value.
C)  certain value.
D)  risk-free value.

Question 16

Spreading risk involves:

Accepted Answer

A)  finding assets whose returns are perfectly negatively correlated.
B)  adding assets to a portfolio that move independently.
C)  investing in bonds and avoiding stocks during bad times.
D)  building a portfolio of assets whose returns move together.

Question 17

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 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 (A)
Expected return = 0.25(-$...

Question 18

Why isn't it correct to say that people who are risk averse avoid risk?

Accepted Answer

This statement really isn't correct.A be...

Question 19

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.

Question 20

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

Accepted Answer

Systematic risk is risk resulting from s...

Exam 5: Understanding Risk

Explain why returns on assets compensate for systematic risk but not for idiosyncratic risk.

Correct Answer
verified
Idiosyncratic risk can be redu...
View Answer

An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time; $2,000 one-half of the time, and $1,750 the rest of the time.What is the investor's expected return?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified
An increase of a deductible from $100 to...
View 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 Answer
verified
We can use the general formula:
Leverage...
View Answer

Correct Answer
verified
Investment (A)
Expected return = 0.25(-$...
View Answer

Which of the following statements is true?

Correct Answer
verified

Calculate the expected value of an investment that has the following payoff frequency: a quarter of the time it will pay $2,000, half of the time it will pay $1,000 and the remaining time it will pay $0.

Correct Answer
verified
The expected value =...
View Answer

Risk-free investments have rates of return:

Correct Answer
verified

Spreading risk involves:

Correct Answer
verified

All other factors held constant, an investment:

Correct Answer
verified

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

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

Explain why a riskier asset offers a higher expected return.

Correct Answer
verified
Due to the higher risk, savers...
View Answer

Why isn't it correct to say that people who are risk averse avoid risk?

Correct Answer
verified
This statement really isn't correct.A be...
View Answer

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

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

Another name for the expected value of an investment would be the:

Correct Answer
verified

An investor practicing hedging would be most likely to:

Correct Answer
verified

An investment with a large spread between possible payoffs will generally have:

Correct Answer
verified

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

Correct Answer
verified

Explain why insurance companies may find themselves at times having to refuse business.

Correct Answer
verified
Insurance companies accept risk from ind...
View Answer

Exam 5: Understanding Risk

Explain why returns on assets compensate for systematic risk but not for idiosyncratic risk.

Correct AnswerverifiedIdiosyncratic risk can be redu...View AnswerShow Answer

An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time; $2,000 one-half of the time, and $1,750 the rest of the time.What is the investor's expected return?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAn increase of a deductible from $100 to...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

Correct AnswerverifiedInvestment (A)Expected return = 0.25(-$...View AnswerShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Calculate the expected value of an investment that has the following payoff frequency: a quarter of the time it will pay $2,000, half of the time it will pay $1,000 and the remaining time it will pay $0.

Correct AnswerverifiedThe expected value =...View AnswerShow Answer

Risk-free investments have rates of return:

Correct AnswerverifiedShow Answer

Spreading risk involves:

Correct AnswerverifiedShow Answer

All other factors held constant, an investment:

Correct AnswerverifiedShow 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

Explain why a riskier asset offers a higher expected return.

Correct AnswerverifiedDue to the higher risk, savers...View AnswerShow Answer

Why isn't it correct to say that people who are risk averse avoid risk?

Correct AnswerverifiedThis statement really isn't correct.A be...View AnswerShow 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

Another name for the expected value of an investment would be the:

Correct AnswerverifiedShow Answer

An investor practicing hedging would be most likely to:

Correct AnswerverifiedShow Answer

An investment with a large spread between possible payoffs will generally have:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain why insurance companies may find themselves at times having to refuse business.

Correct AnswerverifiedInsurance companies accept risk from ind...View AnswerShow Answer

Correct Answer
verified
Idiosyncratic risk can be redu...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
An increase of a deductible from $100 to...
View Answer

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

Correct Answer
verified
Investment (A)
Expected return = 0.25(-$...
View Answer

Correct Answer
verified

Correct Answer
verified
The expected value =...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified
Due to the higher risk, savers...
View Answer

Correct Answer
verified
This statement really isn't correct.A be...
View Answer

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Insurance companies accept risk from ind...
View Answer