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CHAP005 - Chapter 5 Understanding Risk Multiple Choice...

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Chapter 5 Understanding Risk Multiple Choice Questions 2. All other factors held constant: A) An investment with more risk should offer a lower return and sell for a higher price. B) An investment with less risk should sell for a lower price and offer a higher return. C) An investment with more risk should sell for a lower price and offer a higher return. D) An investment with less risk should sell for a lower price and offer a lower return. Answer: C LOD: 2 Page: 91 A-Head: Defining Risk. A-Head: Defining Risk. 4. Inflation presents risk because: A) Inflation is always present. B) Inflation cannot be measured. C) There are different ways to measure it. D) There is no certainty regarding what inflation will be in the future. Answer: D LOD: 2 Page: 91 A-Head: Defining Risk. Cecchetti: Money, Banking, and Financial Markets 103

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Chapter 5 Understanding Risk 8. The expected value of an investment: A) Is what the owner will receive when the investment is sold. B) Is the sum of the probabilities of a payoff times the payoff. C) Is the probability weighted sum of the possible outcomes. D) Cannot be determined in advance. E) b and c Answer: E LOD: 1 Page: 94 A-Head: Measuring Risk. 104 Cecchetti: Money, Banking, and Financial Markets
Chapter 5 Understanding Risk 9. If an investment will return \$1500 half of the time and \$700 half of the time, the expected value of the investment is: A) \$1,250 B) \$1,050 C) \$1,100 D) None of the above. Answer: C LOD: 2 Page: 94 A-Head: Measuring Risk. 11. If an investment has a 20% (0.20) probability of returning \$1,000; a 30% (0.30) probability of returning \$1,500; and a 50% (0.50) probability of returning \$1,800; the expected value is: A) \$1,433.33 B) \$1,550.00 C) The average of the three possible payoffs. D) a and c E) b and c Answer: B LOD: 3 Page: 95 A-Head: Measuring Risk. Cecchetti: Money, Banking, and Financial Markets 105

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Understanding Risk 14. An investor puts \$2000 into an investment that will pay \$2,500 one-fourth of the time; \$2000 one-half of the time, and \$1,750 the rest of the time. What is the investor's expected return? A) 12.5% B) \$250.00 C) 6.25% D) 3.13% Answer: D LOD: 3 Page: 95 A-Head: Measuring Risk. 15. If an individual voluntarily purchases insurance on their home to protect them from a loss due to fire, the individual: A) Is convinced they are going to have a fire. B) Believes the premium for the policy is less than the expected loss from a fire. C) Has calculated the probability of a fire to be high. D) None of the above. Answer: B LOD: 2 Page: 96 A-Head: Measuring Risk. 16. An investment pays \$1,500 half of the time and \$500 half of the time. Its expected value and variance respectively are: A) \$1,000; 500,000 dollars B) \$2,000; 250,000 dollars 2 C) \$1,000; 250,000 dollars D) \$1,000; 250,000 dollars 2 Answer: D LOD: 3 Page: 97 A-Head: Measuring Risk. 106
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CHAP005 - Chapter 5 Understanding Risk Multiple Choice...

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