finance

Question 1

***A stress test

Answer 1

1. Does not look at historical returns and looks at all the details of the portfolios and their vulnerabilities
2. Tries to incorporate all potential economic and financial crises such as; recessions, appreciation, and deprecation

Question 2

Why might investors not normally invest large sums of money into Walmart or Apple stock?

Answer 2

Their stock prices are highly volatile and thus carry a lot of risk

Question 3

why is the normal distribution not a good model for some financial data

Answer 3

It does not have many outliers
(most values drawn from a normal distribution are within a few SDs of the mean. This is not the case in the S&P 500 data)

Question 4

A 5% 3-month (VAR) of $1 million represents

Answer 4

A 5% chance of the asset declining in value by $1 million during the 3month time frame

Question 5

In a capital asset pricing model (CAPM) a measure of systematic risk is captured by

Answer 5

The Beta

Question 6

Market (systematic)risk ______ whereas idiosyncratic risk _______

Answer 6

is the risk for an asset to experience losses due to factors that affect the entire stock market
is the risk that is endemic to a specific asset and therefore not the market as a whole

Question 7

***which best described risk pooling

Answer 7

If individual events are independent, risk can be decreased by averaging across all events

Question 8

Which of the following was NOT a factor which led to the proliferation of life insurance

Answer 8

statistical data on life expectancy

Question 9

What happens in the United States if your insurance company goes bankrupt

Answer 9

consumers are insured from insurance on a state level

Question 10

What problems does the US Affordable Care Act attempt to address and how does it do so

Answer 10

It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty

Question 11

One of the many reasons why many homeowners did not have flood insurance before the advent of Hurricane Katrina in 2005 was

Answer 11

Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance

Question 12

***Under the “don’t put your eggs in one basket” analogy, the eggs represent individual investments and the basket represents the overall investment portfolio. Spreading your “eggs” around allows you to:

Answer 12

Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio

Question 13

Risk diversification can be better achieved:

Answer 13

1. with mutual funds or unit investment trust if you hold a small number of assets
2. by including in your portfolio all classes of assets traded in the market, independently of their risks

Question 14

Short selling, which is defined as the sale of security that the seller has borrowed, is motivated by the belief that:

Answer 14

The price of the security will decline

Question 15

The expected return of a portfolio is computed as__________ and the standard deviation of a portfolio is_________

Answer 15

1. The weighted average of the expected returns of each asset in the portfolio
2. weighted by the investment in each asset NOT the weighted average of the standard deviation of each individual asset

Question 16

An efficient portfolio is a combination of assets which:

Answer 16

Minimizes risk by ensuring only diversifiable risk remains?

Question 17

***While discussing what the future of financial markets will look like, the following arguments were mentioned

Answer 17

1. It is hard to predict the nature of financial markets, this evolution will depend on the involvement of young generations within the financial community
2. It is hard to predict the nature of future financial markets, since human species is the product of a complex evolution

Question 18

In his work, David moss describes how investors psychology favored limited liability after the early 19th century New York experiment. In fact, the comparison between investors psychologies in the context of liability and lottery tickets is:

Answer 18

Asymmetrical. unlimited liability investors tend to overestimate the minimum probability of loss, whereas in lottery tickets, they overestimate the minimum probability of win

Question 19

The introduction of inflation indexed debt was motivated by:

Answer 19

1. An incentive to hedge from inflation volatility
2. Historical examples of nominal debt being wiped out in real terms by high inflation
3. An incentive to have a debt contract fixed in real terms

Question 20

Why did Chile introduce the Undid de Fomento?

Answer 20

To create a unit of account indexed to inflation, in order to counteract the impact of hyperinflation

Question 21

The concept of equity-protected mortgages consists in:

Answer 21

Mortgages that include house price insurance

Question 22

***In the S&p 500 forecasting exercise, many subjects seemed to be subject to the representativeness heuristic. This concept of behavioral finance posits that:

Answer 22

Most people don’t behave like forecasters, what they saw in the past is representative of the future

Question 23

An efficient market is defined as one in which:

Answer 23

Asset prices quickly and fully reflect all available information

Question 24

The dividend Discount model(or the Gordon growth mode) can be stated as follows. Let the investors discount rate be equal to r. If earnings equal dividends, and if dividends grow at the long-run rate g, then the price of the stock P can be written as follows:

Answer 24

P=E/(r-g)

Question 25

Human judgement and experience can play a role in the advent of stock market crash because:

Answer 25

A lot of people who have lived through financial crises have reported that, as consequences of these crises and their narratives, their faiths in the market have diminished