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Finance Quiz: Risk Management and Investment Returns, Quizzes of Investment Theory

University of OttawaInvestment Theory

A quiz on financial concepts, focusing on risk management, investment returns, and market efficiency. It includes multiple-choice questions covering topics such as systemic risk, derivative securities, financial assets, behavioral finance, and the efficient-market hypothesis. The quiz also assesses understanding of risk premiums, holding-period returns, and portfolio construction. It is designed to test knowledge of key principles in finance and investment, providing a comprehensive review of essential concepts. The quiz includes an answer key for self-assessment and learning. It is useful for students and professionals seeking to reinforce their understanding of financial markets and investment strategies. The questions are designed to promote critical thinking and application of financial theories.

Typology: Quizzes

2024/2025

Available from 05/29/2025

elam-dennis
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ADM 3352 Quiz 1_Answered, 2025.
Complete Answer Key Below.
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1)
Systemic risk is
A)
credit risk.
B)
an insurance contract against the default of one or more borrowers.
C)
firm-specific risk.
D)
default risk.
E)
the potential breakdown of the financial system when problems in one market spill
over and disrupt others.
2)
The value of a derivative security
A)
depends on the value of the related security.
B)
is unable to be calculated.
C)
is unrelated to the value of the related security.
D)
has been enhanced due to the recent misuse and negative publicity regarding these
instruments.
E)
is worthless today.
3)
Financial assets permit all of the following except
A)
consumption timing.
B)
allocation of risk.
C)
separation of ownership and control.
D)
elimination of risk.
4)
Although derivatives can be used as speculative instruments, businesses most often use them
to
A)
attract customers.
B)
appease stockholders.
C)
offset debt.
D)
hedge risks.
E)
enhance their balance sheets.
5)
New issues of securities are sold in the market(s).
A)
primary
B)
secondary
C)
over-the-counter
D)
primary and secondary
pf3
pf4
pf5
pf8

Partial preview of the text

Download Finance Quiz: Risk Management and Investment Returns and more Quizzes Investment Theory in PDF only on Docsity!

ADM 3352 Quiz 1_Answered, 2025.

Complete Answer Key Below.

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

  1. Systemic risk is A) credit risk. B) an insurance contract against the default of one or more borrowers. C) firm-specific risk. D) default risk. E) the potential breakdown of the financial system when problems in one market spill over and disrupt others.
  2. The value of a derivative security A) depends on the value of the related security. B) is unable to be calculated. C) is unrelated to the value of the related security. D) has been enhanced due to the recent misuse and negative publicity regarding these instruments. E) is worthless today.
  3. Financial assets permit all of the following except A) consumption timing. B) allocation of risk. C) separation of ownership and control. D) elimination of risk.
  4. Although derivatives can be used as speculative instruments, businesses most often use them to A) attract customers. B) appease stockholders. C) offset debt. D) hedge risks. E) enhance their balance sheets.
  5. New issues of securities are sold in the market(s). A) primary B) secondary C) over-the-counter D) primary and secondary
  1. Conventional theories presume that investors , and behavioral finance presumes that they. A) are irrational; are irrational B) are rational; may not be rational C) are rational; are rational D) may not be rational; may not be rational E) may not be rational; are rational
  2. In regard to moving averages, it is considered to be a signal when market price breaks through the moving average from. A) bearish; below B) bullish; below C) bullish; above D) None of the options are correct.
  3. The premise of behavioral finance is that A) conventional financial theory ignores how real people make decisions and that people make a difference. B) conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors. C) conventional financial theory should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. D) conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. E) None of the options are correct.
  4. The efficient-market hypothesis A) implies that security prices properly reflect information available to investors. B) has little empirical validity. C) implies that active traders will find it difficult to outperform a buy-and-hold strategy. D) has little empirical validity and implies that active traders will find it difficult to outperform a buy-and-hold strategy. E) implies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy-and-hold strategy.
  1. Goldcorp Inc. stock has the following probability distribution of expected prices one year from now: State Probability Price 1 25% $ 2 40% $ 3 35% $ If you buy Goldcorp Inc. today for $15 and it will pay a dividend during the year of $2 per share, what is your expected holding-period return on Goldcorp Inc.? A) 17.72% B) 18.89% C) 17.91% D) 18.18% E) 10%
  2. The holding-period return (HPR) for a stock is equal to A) the real yield minus the inflation rate. B) the nominal yield minus the real yield. C) the capital gains yield minus the tax rate. D) the capital gains yield minus the dividend yield. E) the dividend yield plus the capital gains yield.
  3. Which of the following measures of risk best highlights the potential loss from extreme negative returns? A) Standard deviation B) Variance C) Upper partial standard deviation D) Value at risk (VaR) E) None of the options are correct.
  4. If an investment provides a 1.25% return quarterly, its effective annual rate is A) 5.23%. B) 5.09%. C) 4.02%. D) 4.04%.
  1. Which combination of returns and standard deviation provides the highest Sharpe ratio? Assume a 3% risk free rate. A) return = 12%, standard deviation = 20% B) return = 15%, standard deviation = 22% C) return = 21%, standard deviation = 25% D) return = 25%, standard deviation = 35%
  2. Which of the following statements regarding risk-averse investors is true? A) They only care about the rate of return. B) They accept investments that are fair games. C) They only accept risky investments that offer risk premiums over the risk-free rate. D) They are willing to accept lower returns and high risk. E) They only care about the rate of return, and they accept investments that are fair games.
  3. In the mean-standard deviation graph, an indifference curve has a slope. A) negative B) zero C) positive D) vertical E) Cannot be determined.
  4. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A) for the same risk, David requires a higher rate of return than Elias. B) for the same return, Elias tolerates higher risk than David. C) for the same risk, Elias requires a lower rate of return than David. D) for the same return, David tolerates higher risk than Elias. E) Cannot be determined.
  5. A portfolio has an expected rate of return of 14.22% and a standard deviation of 18%. The risk-free rate is 4.5%. An investor has the following utility function: U = E ( r ) - ( A /2) s 2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset? A) 5 B) 6 C) 7 D) 8 E) 4

Answer Key

Test name: ADM 3352 Quiz 1

1) E

2) A

Of the factors cited above, only the value of the related security affects the value of the derivative and/or is a true statement.

  1. D Financial assets do not allow risk to be eliminated. However, they do permit allocation of risk, consumption timing, and separation of ownership and control.
  2. D Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices. Interest-rate options help companies control financing costs.
  3. A New issues of securities are sold in the primary market.
  4. B Conventional theories presume that investors are rational, and behavioral finance presumes that they may not be rational.
  5. B
  6. A
  7. E
  8. B 1 + R = (1 + r) (1 + i) 1 + 0.1 = (1 + r)(1 + 0.04) R = 0.
  9. D (28 + 1.25-20)/20 = 0.4625 Or46.25%
  10. D
  11. D 16%-4% = 12%
  12. E

(0.25(12 + 2 - 15) + 0.4 (20 + 2-15) + 0.35 (10 + 2 - 15))/15 = 0.1 or 10%

  1. E HPR consists of an income component and a price change component. The income component on a stock is the dividend yield. The price change component is the capital gains yield.
  2. D
  3. B
  4. C Sharpe ratio = (0.21 − 0.03 ) / 0.25 = 0.
  5. C Risk-averse investors only accept risky investments that offer risk premiums over the risk-free rate.
  6. C
  7. D
  8. B
  9. D
  10. B