Question 1

Which is the best example of idiosyncratic risk?

Accepted Answer

Idiosyncratic risk refers to risks that are specific to a particular company or industry, and cannot be diversified away through portfolio diversification. A lawsuit against a corporation because of a faulty product is a prime example of idiosyncratic risk because it is unique to that specific company and cannot be offset or mitigated by investing in other companies or industries. Financial crises, recessions, and rising interest rates are macroeconomic factors that affect the entire market, and therefore are not idiosyncratic risks.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

Liquid assets are those that can be easily turned into cash without losing significant value, making them a preferred choice for investors who need quick access to cash. Risky assets are those with unpredictable returns and potentially high losses, while tax-free assets provide a tax benefit but do not necessarily impact liquidity. Bonds may or may not be liquid depending on their specific terms and conditions.

Question 4

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...

Question 5

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?

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Question 6

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

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Question 7

How can diversification reduce idiosyncratic risk but not systematic risk?

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Question 8

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?

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Question 9

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

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Question 10

A one-year discount bond with a face value of $10,000 that is currently selling for $9,400 has an interest rate of

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 11

A one-year discount bond with a face value of $1,000 that is currently selling for $900 has an interest rate of

Accepted Answer

The interest rate can be calculated as follows:
Discount = Face Value - Selling Price
Discount = $1,000 - $900
Discount = $100

Discount Rate = Discount / Face Value
Discount Rate = $100 / $1,000
Discount Rate = 0.1 or 10%

However, this is the discount rate for one year. To annualize the rate, we need to use the following formula:
Effective Annual Interest Rate = (1 + Discount Rate)^n - 1
Where n is the number of times the discount rate is applied in a year.

Since this is a one-year bond, n = 1. Plugging in the numbers, we get:
Effective Annual Interest Rate = (1 + 0.1)^1 - 1
Effective Annual Interest Rate = 0.1 or 10%

Therefore, the correct answer is C) 11.1%.

Question 12

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

Accepted Answer

Risk averse investors tend to choose diversified portfolios in order to manage and minimize risk. By spreading their investments across different asset classes, sectors, and geographical regions, they can reduce their exposure to individual securities and market fluctuations. Risk loving, risk neutral, and risk tolerant investors may be more willing to take concentrated positions or bet on specific stocks or sectors, which can be more volatile and risky.

Question 13

The bond demand curve slopes down because

Accepted Answer

The bond demand curve slopes down because as the price of the bond decreases, the lender is willing and able to purchase more bonds. This is because the lower price of the bond means the lender can earn a higher yield, making the bond more attractive. Conversely, as the price of the bond increases, the lender is less willing to purchase the bond because the yield decreases.

Question 14

Which of the following assets had both the lowest average annual return and lowest risk between 1926 and 2015?

Accepted Answer

U.S. Treasury bills had the lowest average annual return and lowest risk between 1926 and 2015. During this period, the average annual return for U.S. Treasury bills was 3.5%, which was lower than the returns for small company stocks, large company stocks, and long-term corporate bonds. However, U.S. Treasury bills also had the lowest risk, as measured by their standard deviation, compared to the other assets.

Question 15

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?

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Question 16

What is a black swan event?

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

Question 17

A one-year discount bond with a face value of $1,000 has an interest rate of 4%.What is its price?

Accepted Answer

To calculate the price of the bond, we need to use the following formula:
Price = Face Value / (1 + interest rate * time period)
In this case, the time period is 1 year, so we have:
Price = 1000 / (1 + 0.04 * 1)
Price = 1000 / 1.04
Price = $961.54
Therefore, the best choice is B, which is the price of the bond based on the given information.

Question 18

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

Accepted Answer

CThe yield to maturity (YTM) on a discount bond is calculated based on the return an investor will receive if they hold the bond until its maturity date. The correct formulas are:A) i = (Face value - Price)/Price, which represents the return on the investment based on the purchase price.C) i = (Face value - Price)/Face value, which represents the return on the investment based on the face value of the bond. Both formulas are used to calculate YTM, but they provide different perspectives on the return.

Question 19

Diversification is most effective in reducing

Accepted Answer

Diversification is most effective in reducing market risk, which is the risk that affects the entire market.

Question 20

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

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.

Quiz 4: Determining Interest Rates