Risk and Return

Question 1

Evidence of risk aversion is best illustrated by a risk-return relationship that is:
A) negative.
B) neutral.
C) positive.

Answer 1

A) negative.

Question 2

Which of the following investments are most likely the best choices for an investor who is
concerned about the long-term effects of inflation?
I. Diversified equities
II. Commodities
III. U.S. Treasury securities
IV. TIPS

A) I and III
B) I and IV
C) II and III
D) II and IV

Answer 2

D) II and IV

Question 3

With respect to the pricing of risk in capital market theory, which of the following
statements is most accurate?
A) All risk is priced.
B) Systematic risk is priced.
C) Nonsystematic risk is priced.

Answer 3

B) Systematic risk is priced.

Question 4

Which of the following return calculating methods is best for evaluating the annualized
average percentage returns of a buy-and-hold strategy that consists of making annual
deposits to an investment account for a period of five years?
A) Geometric mean return
B) Arithmetic mean return
C) Money-weighted return

Answer 4

A) Geometric mean return

Question 5

A major disadvantage to using value at risk measures is the possibility that:
A) The range of returns used is narrow.
B) The range of returns used is broad.
C) VaR is not statistically based.
D) There are no constant methods used to calculate VaR.

Answer 5

A) The range of returns used is narrow.