Topic 4 Quiz - Part 1 Answers

 

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

  1. positive

  2. inverse

  3. direct

  4. indirect

 

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.

 

 

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

  1. seek out risk

  2. avoid risk

  3. are indifferent to risk

 

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

  1. true

  2. false

 

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

 

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

 

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

 

 

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

 

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

  1. higher

  2. lower

  3. more irrelevant

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

19.     You would expect the returns on Dell Computer stock and Caterpillar Equipment stock to have a ______ correlation.

  1. high positive

  2. low positive

  3. small negative
  4. large negative

   

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.