Chapter 5 Flashcards
From an economic perspective, risk has several important elements. Which of the following is NOT one of these elements?
It is not relative to a benchmark
The possibility of loss or injury
Suppose you want to know the risk associated with a specific investment strategy. The most appropriate benchmark would be the ___.
risk associated with other strategies
Which of the following is an event that is least likely to occur?
An event with probability of 0.1
Which of the following is true about the definition of risk given in the text?
Risk must be measured against some benchmark.
In considering the performance of a particular money manager, a good benchmark
is the performance of a group of experienced money managers.
Between standard deviation and variance, ________ is considered more useful in investment analysis because __________.
standard deviation; like payoffs, it is measured in dollars
The more spread out the possible payoffs from an investment are, the ________ the investment’s standard deviation and the _________ its risk.
higher, higher
The two methods used in the text for measuring the risk of an investment are ________.
variance and value at risk
Why do we square the differences from the expected value?
To prevent the high and low payoffs from canceling out.
All else equal, investors prefer ______ expected values and _______ standard deviations.
higher, lower
When an individual is “hedging” it means they are
making two investments with opposing risks.
reducing idiosyncratic risk.
Idiosyncratic risk comes in two types. Which of the following accurately describes them?
One type affects some firms one way and some another; the other type affects only one type of firm and not others.
In order to “spread risk,” you need to
find investments with unrelated payoffs.
John wants his investments to do well no matter whether people tend to drive their own vehicles or ride public transportation, so he buys securities from both car manufacturers and bus companies. John is engaging in ______, which is used to manage _____ risk.
hedging; idiosyncratic
