Question 1

What is a black swan event?

Accepted Answer

The answer of What is a black swan event?...

Question 2

How can diversification reduce idiosyncratic risk but not systematic risk?

Accepted Answer

The answer of How can diversification reduce idiosyncratic risk but...

Question 3

In November 2012, HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over. This is an example of:
A)market risk
B)systemic risk
C)idiosyncratic risk
D)liquidity risk

Accepted Answer

The answer of In November 2012, HP claimed that they...

Question 4

Which is the best example of idiosyncratic risk?
A)a financial crisis
B)a lawsuit because the corporation produced a faulty product
C)a recession
D)rising interest rates

Accepted Answer

Idiosyncratic risk refers to risks that are specific to a particular company, such as a lawsuit due to a faulty product. A financial crisis, recession, and rising interest rates are examples of systematic risk, which affect the overall market and most companies.

Question 5

The wealth of most people declined as a result of the financial crisis of 2007-2009. As a result, which asset was most likely became a larger portion of their portfolio?
A)bonds
B)stocks
C)house
D)checking account

Accepted Answer

The answer of The wealth of most people declined as...

Question 6

Suppose you are risk neutral and you are deciding between two investments. One has a guaranteed return of 2% while the second has a 60% chance of a 10% return and a 40% chance of a -5% return. Which investment would you choose? Why?

Accepted Answer

The answer of Suppose you are risk neutral and you...

Question 7

Suppose you are risk loving and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?

Accepted Answer

The answer of Suppose you are risk loving and you...

Question 8

A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of
A)5)26%.
B)10%.
C)11.1%.
D)100%.

Accepted Answer

The interest rate of the bond can be calculated using the formula:

Interest rate = (face value - current price) / face value x (1 / time to maturity)

In this case, face value is $1000, current price is $900, and time to maturity is 1 year.

Interest rate = (1000-900) / 1000 x (1 / 1) = 0.1 or 10%

Therefore, the correct answer is choice C.

Question 9

How should a financial plan of an older saver differ from that of a younger saver?

Accepted Answer

The answer of How should a financial plan of an...

Question 10

Which of the following assets had both the lowest average annual return and lowest risk between 1926 and 2011?
A)small company stocks
B)large company stocks
C)long-term corporate bonds
D)U)S. Treasury bills

Accepted Answer

U.S. Treasury bills had the lowest average annual return and lowest risk between 1926 and 2011 compared to the other options listed.

Question 11

The bond demand curve slopes down because
A)interest rates decline as bond prices decline.
B)when bond prices are low, inflation is low.
C)the lender is willing and able to purchase more bonds when the price of the bond is low.
D)the borrower is willing and able to purchase more bonds when the price of the bond is low.

Accepted Answer

The bond demand curve slopes down because the lender is willing and able to purchase more bonds when the price of the bond is low. As the price of bonds decreases, their yield increases, making them more attractive to investors seeking fixed income. Therefore, when bond prices decrease, demand for them increases, leading to a downward-sloping demand curve. Options A, B, and D are incorrect because they do not accurately describe the relationship between bond prices and demand.

Question 12

An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be:
A)risk loving
B)risk averse
C)risk neutral
D)risk avoiding

Accepted Answer

Risk neutral investors are those who are indifferent to risk when making investment decisions, focusing solely on the expected return without concern for the variability or risk of those returns.

Question 13

Diversification is most effective in reducing:
A)market risk
B)systemic risk
C)idiosyncratic risk
D)all forms of risk

Accepted Answer

The answer of Diversification is most effective in reducing:
A)market risk
B)systemic...

Question 14

The formula for the yield to maturity, i, on a discount bond is
A)i = (Face value - Discount price)/Discount price.
B)i = (Discount price - Face value)/Discount price.
C)i = (Face value - Discount price)/Face value.
D)i = (Discount price - Face value)/Face value.

Accepted Answer

The yield to maturity (YTM) on a discount bond is calculated as the annualized return based on the bond's coupon payments, face value, and its current price. The correct formula for YTM on a discount bond, where the bond is purchased at a discount to its face value, is i = (Face value - Discount price)/Discount price. This formula correctly represents the return on investment for the bondholder, as it calculates the ratio of the profit (the difference between the face value and the purchase price) to the initial investment (the purchase price).

Question 15

Suppose you are risk averse and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?

Accepted Answer

The answer of Suppose you are risk averse and you...

Question 16

A one-year discount bond with a face value of $10,000 that is currently selling for $9400 has an interest rate of
A)3)10%.
B)6%.
C)6)38%.
D)60%.

Accepted Answer

The formula to calculate the interest rate of discount bonds is:

Interest rate = (Face value - Selling price) / Face value * time period

In this case, the face value is $10,000, the selling price is $9,400, and the time period is 1 year.

Interest rate = (10,000 - 9,400) / 10,000 * 1 = 0.06 or 6.38%

Therefore, the interest rate of the bond is 6.38%, so the correct answer is C.

Question 17

An investor who desired the ability to have quick and easy access to cash would prefer to hold which type of asset?
A)risky
B)liquid
C)tax free
D)any form of bond

Accepted Answer

An investor who desires quick and easy access to cash should hold a liquid asset. Liquid assets are easily converted into cash without a significant price reduction or penalty, unlike risky assets that may be difficult to sell or come with high transaction costs. Tax-free assets and a specific form of bond are irrelevant to this question.

Question 18

A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is its price?
A)$960
B)$961.54
C)$996
D)$1,040

Accepted Answer

The price of a one-year discount bond can be calculated using the following formula:

Price = Face Value / (1 + Interest Rate)

Substituting the given values, we get:

Price = 1000 / (1 + 0.04) = $961.54

Therefore, the correct answer is B.

Question 19

Which type of investor is most likely to have a diversified portfolio?
A)risk averse
B)risk loving
C)risk neutral
D)risk tolerant

Accepted Answer

Risk averse investors are more likely to have a diversified portfolio because they prefer to reduce their risk and spread their investments across different types of assets. Diversification helps to minimize the impact of individual investment losses and provides a more stable return over time. Risk-loving investors tend to concentrate their investments in high-risk assets, while risk-neutral and risk-tolerant investors may have varying degrees of diversification in their portfolio.

Question 20

If you think that there is a 75% chance of a stock increasing by 8% and a 25% change of it falling by 20%, what is the expected return on the stock? Report using percentages with two decimal places.

Accepted Answer

The answer of If you think that there is a...

Quiz 4: Determining Interest Rates

What is a black swan event?

How can diversification reduce idiosyncratic risk but not systematic risk?

In November 2012, HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over. This is an example of:

Which is the best example of idiosyncratic risk?

The wealth of most people declined as a result of the financial crisis of 2007-2009. As a result, which asset was most likely became a larger portion of their portfolio?

Suppose you are risk neutral and you are deciding between two investments. One has a guaranteed return of 2% while the second has a 60% chance of a 10% return and a 40% chance of a -5% return. Which investment would you choose? Why?

Suppose you are risk loving and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?

A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of

How should a financial plan of an older saver differ from that of a younger saver?

Which of the following assets had both the lowest average annual return and lowest risk between 1926 and 2011?

The bond demand curve slopes down because

An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be:

Diversification is most effective in reducing:

The formula for the yield to maturity, i, on a discount bond is

Suppose you are risk averse and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?

A one-year discount bond with a face value of $10,000 that is currently selling for $9400 has an interest rate of

An investor who desired the ability to have quick and easy access to cash would prefer to hold which type of asset?

A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is its price?

Which type of investor is most likely to have a diversified portfolio?

If you think that there is a 75% chance of a stock increasing by 8% and a 25% change of it falling by 20%, what is the expected return on the stock? Report using percentages with two decimal places.