Topic 4 Quiz - Part 1 Questions

Note: There may be more than one correct answer for these questions.

1.    The relationship between risk and return is a _____ relationship.

1. positive

2. inverse

3. direct

4. indirect

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  • Correct answers are both 'a' and 'c'

2.    Which of the following statements is the best in describing the risk-return relationship? 

1. There is a positive relationship between risk and actual returns.

2. There is a positive relationship between expected levels of risk and expected return.

3. There is a negative relationship between risk and actual returns.

4. There is a negative relationship between expected levels of risk and expected return.

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  • Correct answer is 'b'

3.    People are said to be risk averse if they _____.

1. seek out risk

2. avoid risk

3. are indifferent to risk

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  • Correct answer is 'b'

4.    Since people are risk averse, they demand additional compensation for taking on additional investment risk.

1. true

2. false

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  • Correct answer is 'a'

5.    Default risk is the _____.

1. risk of changes in the price of an asset in response to changes in interest rates

2. risk associated with inflation

3. risk associated with the inability of selling an asset on short notice without loss of value

4. interest rate risk that impacts the rate of return that can be earned by current investment opportunities

5. risk of non-payment

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  • Correct answer is 'e'

6.    Purchasing power risk is the _____.

1. risk of changes in the price of an asset in response to changes in interest rates

2. risk associated with inflation

3. risk associated with the inability of selling an asset on short notice without loss of value

4. interest rate risk that impacts the rate of return that can be earned by current investment opportunities

5. risk of non-payment

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  • Correct answer is 'b'

7.    Liquidity risk is the _____.

1. risk of changes in the price of an asset in response to changes in interest rates

2. risk associated with inflation

3. risk associated with the inability of selling an asset on short notice without loss of value

4. interest rate risk that impacts the rate of return that can be earned by current investment opportunities

5. risk of non-payment

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  • Correct answer is 'c'

8.    There are two types of interest rate risk, _____.

1. price risk

2. inflation risk

3. liquidity risk

4. reinvestment rate risk

5. compound risk

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  • Correct answers are 'a' and 'd'

9.    The greater the liquidity of an asset, the ____ the liquidity risk.

1. higher

2. lower

3. more irrelevant

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  • Correct answer is 'b'

10.    If you randomly choose any two asset investments and calculated the correlation between their returns, you would most likely find that the correlation coefficient between the two returns _____.

1. is negative

2. is less than or equal to 0 

3. is usually equal to +1

4. is usually positive and never below .5

5. is usually positive and between +.3 and +.7

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  • Correct answer is 'e'

11.      Perfect positive correlation means that___.  

1. total diversification can be achieved
2. there will be no diversification effect
3. the correlation is equal to zero
4. none of the above

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  • Correct answer is 'b'

12.    Perfect negative correlation means that ___. 

1. total diversification can be achieved
2. there will be no diversification effect
3. the correlation is equal to zero
4. none of the above

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  • Correct answer is 'a'

13.    For any two assets, it’s possible for the correlation coefficient to be anywhere  _____.

1. between -1.0 and 0.0
2. between 0.0 and +1.0
3. between -1.0 and +1.0
4. between +.3 and +.7

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  • Correct answer is 'c'

14.    If two stocks have a negative correlation, this means that they tend to move in the same direction over time. 

1. True
2. False

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  • Correct answer is 'b'

15.    For any two stocks that are randomly chosen, it’s typical for the correlation coefficient to be _____. 

1. between -1.0 and 0.0
2. between 0.0 and +1.0
3. between -1.0 and +1.0
4. between +.3 and +.7

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  • Correct answer is 'd'

16.    If two stocks have a positive correlation, this means that they tend to move in the same direction over time. 

1. True
2. False

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  • Correct answer is 'a'

17.    In general, the _____ the correlation between two stock returns, the _____ the diversification effect. 

1.  higher, higher
2.  higher, lower
3.  lower, higher
4.  lower, lower

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  • Correct answers are 'b' and 'c'

18.    You would expect the returns on Dell Computer stock and Compaq Computer stock to have a ______ correlation.

1. high positive
2. low positive
3. small negative
4. large negative

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  • Correct answer is 'a'

19.     You would expect the returns on Dell Computer stock and Caterpillar Equipment (manufacturer of heavy construction equipment) stock to have a ______ correlation.

1. high positive
2. low positive
3. small negative
4. large negative

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  • Correct answer is 'b'

These study questions only cover the online class notes. 

You should also be able to answer any of the assigned discussion questions and problems in the text book assignments.