Question 1

Most managers are risk-averse, since for a given increase in risk they require an increase in return.

Accepted Answer

This statement is true. Managers typically seek to minimize risk and maximize return on investments, so they are generally risk-averse and require a higher potential return in order to justify taking on more risk.

Question 2

For the risk-averse manager, the required return decreases for an increase in risk.

Accepted Answer

This statement is not true. The required return generally increases as risk increases for a risk-averse manager, as they will require greater compensation for the additional risk they are taking on.

Question 3

If a person requires greater return when risk increases, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.

Accepted Answer

C

Question 4

Interest rate risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

Accepted Answer

The answer of Interest rate risk is the chance that...

Question 5

Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances over the same period. Both investments have equal risk.

Accepted Answer

Investment B has a higher potential return (but also a potential loss), so it has higher risk than Investment A.

Question 6

Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

Accepted Answer

The answer of Financial risk is the chance that the...

Question 7

For the risk-seeking manager, no change in return would be required for an increase in risk.

Accepted Answer

The answer of For the risk-seeking manager, no change in...

Question 8

If a person's required return decreases for an increase in risk, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.

Accepted Answer

When a person's required return decreases for an increase in risk, it means that the person is willing to take on more risk to potentially receive higher returns. This behavior is known as risk-seeking.

Question 9

The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested.
A) return
B) value
C) risk
D) probability

Accepted Answer

The definition provided in the question is that of "return" which is the choice A.

Question 10

Business risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

Accepted Answer

Business risk is defined as the risk associated with a company's ability to generate sufficient revenue to cover its operating expenses. It is affected by various factors such as revenue stability, operating costs (fixed vs. variable), competition, market conditions, etc. Hence, option A is true.

Question 11

The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.

Accepted Answer

The return on an asset is the change in its value plus any cash distributions over a given period of time, expressed as a percentage of its beginning value, not its ending value.

Question 12

If a person's required return does not change when risk increases, that person is said to be
A) risk-seeking.
B) risk-neutral.
C) risk-averse.
D) risk-aware.

Accepted Answer

A person who is risk-neutral is willing to accept any level of risk as long as the potential return offsets the risk. Therefore, their required return would not change even if the risk increases.

Question 13

Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

Accepted Answer

Interest rate risk is a real risk in investments where changes in interest rates can lead to the decrease or increase in the value of investments. When interest rates rise, the value of most investments declines, and vice versa.

Question 14

Risk aversion is the behavior exhibited by managers who require a (n) ________.
A) increase in return, for a given decrease in risk
B) increase in return, for a given increase in risk
C) decrease in return, for a given increase in risk
D) decrease in return, for a given decrease in risk

Accepted Answer

The answer of Risk aversion is the behavior exhibited by...

Question 15

Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

Accepted Answer

The answer of Purchasing-power risk is the chance that changes...

Question 16

For the risk-indifferent manager, no change in return would be required for an increase in risk.

Accepted Answer

Risk-indifferent managers are willing to take on additional risk without requiring any increase in return.

Question 17

For the risk-averse manager, required return would decrease for an increase in risk.

Accepted Answer

For a risk-averse manager, required return would increase for an increase in risk. This is because the manager will expect compensation for taking on additional risk.

Question 18

Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent

Accepted Answer

The answer of Last year Mike bought 100 shares of...

Question 19

Liquidity risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

Accepted Answer

The answer of Liquidity risk is the chance that changes...

Question 20

________ is the chance of loss or the variability of returns associated with a given asset.
A) Return
B) Value
C) Risk
D) Probability

Accepted Answer

Risk refers to the possibility of losing money or not receiving the expected return associated with a particular investment. It is an essential factor to consider in investment decisions because it affects both expected returns and long-term goals. A higher risk is typically associated with higher potential returns, while lower risk investments usually come with lower returns.

Quiz 8: Risk and Return

Most managers are risk-averse, since for a given increase in risk they require an increase in return.

For the risk-averse manager, the required return decreases for an increase in risk.

If a person requires greater return when risk increases, that person is said to be

Interest rate risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances over the same period. Both investments have equal risk.

Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

For the risk-seeking manager, no change in return would be required for an increase in risk.

If a person's required return decreases for an increase in risk, that person is said to be

The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested.

Business risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.

If a person's required return does not change when risk increases, that person is said to be

Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

Risk aversion is the behavior exhibited by managers who require a (n) ________.

Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

For the risk-indifferent manager, no change in return would be required for an increase in risk.

For the risk-averse manager, required return would decrease for an increase in risk.

Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?

Liquidity risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

________ is the chance of loss or the variability of returns associated with a given asset.