Question 1

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.

Question 2

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

Accepted Answer

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

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

When measuring the risk of an asset:

Accepted Answer

A)   one must measure the 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 5

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 6

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 7

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 8

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.

Question 9

The standard deviation is generally more useful than the variance because:

Accepted Answer

A)   it is easier to calculate.
B)   variance is a measure of risk, where standard deviation is a measure of return.
C)   standard deviation is calculated in the same units as payoffs and variance isn't.
D)   it can measure unquantifiable risk.

Question 10

The variance of a portfolio of assets:

Accepted Answer

A)   decreases as the number of assets increases.
B)   increases as the number of assets increase.
C)   approaches 0 as the number of assets decreases.
D)   approaches 1 as the number of assets increases.

Question 11

An automobile insurance company that writes millions of policies is practicing a form of:

Accepted Answer

A)   mutual fund.
B)   hedging risk.
C)   spreading risk.
D)   eliminating systematic risk.

Question 12

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.

Accepted Answer

An increase of a deductible from $100 to...

Question 13

If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a
1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?

Accepted Answer

We can calculate the expected loss for a...

Question 14

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

Accepted Answer

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

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.

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

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

Accepted Answer

A)   more likely to occur.
B)   certain to occur.
C)   less likely to occur.
D)   certain not to occur.

Question 18

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 19

The difference between standard deviation and value at risk is:

Accepted Answer

A)   nothing, they are two names for the same thing.
B)   value at risk is a more common measure in financial circles than is standard deviation.
C)   standard deviation reflects the spread of possible outcomes where value at risk focuses on the value of the worst outcome.
D)   value at risk is expected value times the standard deviation.

Question 20

Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

Accepted Answer

A)   Investment A and B have the same expected value, but A has greater risk.
B)   Investment B has a higher expected value than A, but also greater risk.
C)   Investment A and B have the same expected value, but A has lower risk than B.
D)   Investment A has a greater expected value than B, but B has less risk.

Exam 5: Understanding Risk

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 b...
View Answer

The variance of a portfolio of assets:

Correct Answer
verified

The standard deviation is generally more useful than the variance because:

Correct Answer
verified

If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a 1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?

Correct Answer
verified
We can calculate the expected loss for a...
View Answer

Risk-free investments have rates of return:

Correct Answer
verified

The difference between standard deviation and value at risk is:

Correct Answer
verified

Spreading risk involves:

Correct Answer
verified

Correct Answer
verified
An increase of a deductible from $100 to...
View 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 Answer
verified
The expected value =...
View 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 Answer
verified

The expected value of an investment:

Correct Answer
verified

Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

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

Correct Answer
verified

When measuring the risk of an asset:

Correct Answer
verified

An automobile insurance company that writes millions of policies is practicing a form of:

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Hedging risk and spreading risk are two ways to:

Correct Answer
verified

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

Correct Answer
verified

Exam 5: Understanding Risk

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

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

The variance of a portfolio of assets:

Correct AnswerverifiedShow Answer

The standard deviation is generally more useful than the variance because:

Correct AnswerverifiedShow Answer

If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a 1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?

Correct AnswerverifiedWe can calculate the expected loss for a...View AnswerShow Answer

Risk-free investments have rates of return:

Correct AnswerverifiedShow Answer

The difference between standard deviation and value at risk is:

Correct AnswerverifiedShow Answer

Spreading risk involves:

Correct AnswerverifiedShow Answer

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

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

The expected value of an investment:

Correct AnswerverifiedShow Answer

Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When measuring the risk of an asset:

Correct AnswerverifiedShow Answer

An automobile insurance company that writes millions of policies is practicing a form of:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Hedging risk and spreading risk are two ways to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
We can calculate the expected loss for a...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified