MBA 702 MODULE 3 EXAMINATION COMPLETE
QUESTIONS AND DETAILED SOLUTIONS LATEST
UPDATE THIS YEAR JUST RELEASED
1.
An investment has possible annual returns of 4%, 10%, and 16%, with
probabilities of 20%, 50%, and 30%, respectively. What is its expected return?
A. 9.2%
B. 10.4%
C. 11.0%
D. 12.6%
Answer: B. 10.4%
Rationale: Expected return is calculated by multiplying each possible return by its
probability and then summing the probability-weighted returns: (0.20 × 4%) +
(0.50 × 10%) + (0.30 × 16%) = 10.4%.
2.
Which statement most accurately describes investment risk when evaluating the
possible future returns associated with a particular security?
A. Risk is the guaranteed return from an investment.
B. Risk represents uncertainty surrounding the investment's actual future return.
,C. Risk measures only the amount of dividends received.
D. Risk is identical to the investment's expected return.
Answer: B. Risk represents uncertainty surrounding the investment's actual
future return.
Rationale: Investment risk generally reflects uncertainty that actual outcomes will
differ from expected outcomes. Greater variability in potential returns indicates
greater uncertainty.
3.
An analyst compares two securities having identical expected returns but
different standard deviations. Which security represents greater total investment
risk?
A. The security with the lower standard deviation
B. The security with the higher standard deviation
C. Both securities have identical risk
D. Risk cannot be evaluated using standard deviation
Answer: B. The security with the higher standard deviation
Rationale: Standard deviation measures the dispersion of possible returns around
the expected return. Holding expected returns constant, a larger standard
deviation indicates greater variability and therefore greater risk.
4.
,A portfolio contains several stocks whose returns are not perfectly positively
correlated. Why can combining these securities reduce portfolio risk?
A. Diversification eliminates every possible type of financial risk.
B. Different securities may experience unfavorable returns at different times.
C. Diversification guarantees higher expected portfolio returns.
D. Portfolio risk becomes zero whenever more than three securities exist.
Answer: B. Different securities may experience unfavorable returns at different
times.
Rationale: Imperfect correlation allows favorable performance from some
investments to partially offset unfavorable performance from others, reducing
portfolio variability.
5.
An investor adds a security to a diversified portfolio. The new security has a low
correlation with existing holdings. What is the most likely portfolio effect?
A. Portfolio diversification benefits may increase.
B. Portfolio risk must automatically increase.
C. Expected return becomes zero.
D. Systematic risk is completely eliminated.
Answer: A. Portfolio diversification benefits may increase.
Rationale: Low correlation means the new security's returns tend to move less
closely with existing holdings, potentially reducing overall portfolio volatility.
, 6.
Which type of risk cannot generally be eliminated completely through
diversification because it affects broad financial markets?
A. Firm-specific risk
B. Unsystematic risk
C. Systematic risk
D. Operational risk
Answer: C. Systematic risk
Rationale: Systematic risk arises from broad economic or market factors and
affects many securities simultaneously, making it difficult to eliminate through
diversification.
7.
A company experiences a sudden decline in its stock price after one of its
factories suffers a major equipment failure. This event primarily represents which
type of risk?
A. Systematic market risk
B. Unsystematic company-specific risk
C. Inflation risk
D. Interest-rate risk
Answer: B. Unsystematic company-specific risk
QUESTIONS AND DETAILED SOLUTIONS LATEST
UPDATE THIS YEAR JUST RELEASED
1.
An investment has possible annual returns of 4%, 10%, and 16%, with
probabilities of 20%, 50%, and 30%, respectively. What is its expected return?
A. 9.2%
B. 10.4%
C. 11.0%
D. 12.6%
Answer: B. 10.4%
Rationale: Expected return is calculated by multiplying each possible return by its
probability and then summing the probability-weighted returns: (0.20 × 4%) +
(0.50 × 10%) + (0.30 × 16%) = 10.4%.
2.
Which statement most accurately describes investment risk when evaluating the
possible future returns associated with a particular security?
A. Risk is the guaranteed return from an investment.
B. Risk represents uncertainty surrounding the investment's actual future return.
,C. Risk measures only the amount of dividends received.
D. Risk is identical to the investment's expected return.
Answer: B. Risk represents uncertainty surrounding the investment's actual
future return.
Rationale: Investment risk generally reflects uncertainty that actual outcomes will
differ from expected outcomes. Greater variability in potential returns indicates
greater uncertainty.
3.
An analyst compares two securities having identical expected returns but
different standard deviations. Which security represents greater total investment
risk?
A. The security with the lower standard deviation
B. The security with the higher standard deviation
C. Both securities have identical risk
D. Risk cannot be evaluated using standard deviation
Answer: B. The security with the higher standard deviation
Rationale: Standard deviation measures the dispersion of possible returns around
the expected return. Holding expected returns constant, a larger standard
deviation indicates greater variability and therefore greater risk.
4.
,A portfolio contains several stocks whose returns are not perfectly positively
correlated. Why can combining these securities reduce portfolio risk?
A. Diversification eliminates every possible type of financial risk.
B. Different securities may experience unfavorable returns at different times.
C. Diversification guarantees higher expected portfolio returns.
D. Portfolio risk becomes zero whenever more than three securities exist.
Answer: B. Different securities may experience unfavorable returns at different
times.
Rationale: Imperfect correlation allows favorable performance from some
investments to partially offset unfavorable performance from others, reducing
portfolio variability.
5.
An investor adds a security to a diversified portfolio. The new security has a low
correlation with existing holdings. What is the most likely portfolio effect?
A. Portfolio diversification benefits may increase.
B. Portfolio risk must automatically increase.
C. Expected return becomes zero.
D. Systematic risk is completely eliminated.
Answer: A. Portfolio diversification benefits may increase.
Rationale: Low correlation means the new security's returns tend to move less
closely with existing holdings, potentially reducing overall portfolio volatility.
, 6.
Which type of risk cannot generally be eliminated completely through
diversification because it affects broad financial markets?
A. Firm-specific risk
B. Unsystematic risk
C. Systematic risk
D. Operational risk
Answer: C. Systematic risk
Rationale: Systematic risk arises from broad economic or market factors and
affects many securities simultaneously, making it difficult to eliminate through
diversification.
7.
A company experiences a sudden decline in its stock price after one of its
factories suffers a major equipment failure. This event primarily represents which
type of risk?
A. Systematic market risk
B. Unsystematic company-specific risk
C. Inflation risk
D. Interest-rate risk
Answer: B. Unsystematic company-specific risk
