Unit 3. Risk, Return and Investment
Performance
Risk is often taken to mean the degree of uncertainty associated with the return of an asset or volatility
of returns. - correct answer ✔✔True
Risk is commonly defined as the uncertainty, variability or volatility of an investment's return.
Exchange rate risk is a type of systematic risk.
t/f - correct answer ✔✔True
Exchange rate risk is no diversifiable and therefore is a systematic risk.
Financial risk is related to the amount of debt a company has.
t/f - correct answer ✔✔True
Financial risk is associated with the leverage, or amount of debt, a company has issued.
Liquidity risk is a type of systematic risk.
t/f - correct answer ✔✔False
Liquidity risk is the risk of transforming an investment into cash in a short period of time. It is unique to
individual investments and therefore is an unsystematic risk.
One type of systematic risk is interest rate risk.
t/f - correct answer ✔✔True
Interest rate risk is a systematic risk because it cannot be diversified away.
According to the Barnewall study, which one of the follow groups is less risk averse?
corporate executives
,individuals with inherited wealth
lawyers in large regional firms
surgeons - correct answer ✔✔surgeons
Surgeons are less risk averse.
Business risk is a type of unsystematic risk.
t/f - correct answer ✔✔True
Business risk is one type of unsystematic ris
Call risk is the risk that the bondholder will redeem the bond prior to maturity.
t/f - correct answer ✔✔False
Call risk is the risk that the bond issuer, not the bondholder, will call for redemption of the bond prior to
maturity.
There is no risk in Treasury securities.
t/f - correct answer ✔✔False
Every investment has some kind of risk—even Treasury securities, which have interest rate risk and
purchasing power risk. Treasury securities have been to date considered to have no default risk, but
given today's changing world, even this could change.
Assume in a graph of the efficient frontier, you have a portfolio on the efficient frontier (point A) and
another portfolio directly below it (point B). This means that, relative to point B, point A
has more return with equal risk.
has more risk with equal return.
, has equal risk with less return.
is less efficient. - correct answer ✔✔has more return with equal risk.
Point A has more return (on the y-axis) with the same risk (x-axis) relative to point B.
A point above the efficient frontier is inefficient. - correct answer ✔✔False
A point above the efficient frontier is unattainable.
Assume each of the asset classes below has the following correlation to small-cap stocks:
Treasury bills: .11
Corporate bonds: .34
Large-cap stocks: .91
Intermediate-term U.S. government bonds: .44
Which one of the following provides the most diversification to small-cap stocks?
Treasury bills
Corporate bonds
Large-cap stocks
Intermediate-term U.S. government bonds - correct answer ✔✔Treasury bills
The correlation farthest from +1.0 gives the greatest diversification. Therefore in this scenario, Treasury
bills provide the most diversification.
A portfolio above the efficient frontier is one that uses leverage. - correct answer ✔✔False
A portfolio above the efficient frontier is one that is unattainable.
Performance
Risk is often taken to mean the degree of uncertainty associated with the return of an asset or volatility
of returns. - correct answer ✔✔True
Risk is commonly defined as the uncertainty, variability or volatility of an investment's return.
Exchange rate risk is a type of systematic risk.
t/f - correct answer ✔✔True
Exchange rate risk is no diversifiable and therefore is a systematic risk.
Financial risk is related to the amount of debt a company has.
t/f - correct answer ✔✔True
Financial risk is associated with the leverage, or amount of debt, a company has issued.
Liquidity risk is a type of systematic risk.
t/f - correct answer ✔✔False
Liquidity risk is the risk of transforming an investment into cash in a short period of time. It is unique to
individual investments and therefore is an unsystematic risk.
One type of systematic risk is interest rate risk.
t/f - correct answer ✔✔True
Interest rate risk is a systematic risk because it cannot be diversified away.
According to the Barnewall study, which one of the follow groups is less risk averse?
corporate executives
,individuals with inherited wealth
lawyers in large regional firms
surgeons - correct answer ✔✔surgeons
Surgeons are less risk averse.
Business risk is a type of unsystematic risk.
t/f - correct answer ✔✔True
Business risk is one type of unsystematic ris
Call risk is the risk that the bondholder will redeem the bond prior to maturity.
t/f - correct answer ✔✔False
Call risk is the risk that the bond issuer, not the bondholder, will call for redemption of the bond prior to
maturity.
There is no risk in Treasury securities.
t/f - correct answer ✔✔False
Every investment has some kind of risk—even Treasury securities, which have interest rate risk and
purchasing power risk. Treasury securities have been to date considered to have no default risk, but
given today's changing world, even this could change.
Assume in a graph of the efficient frontier, you have a portfolio on the efficient frontier (point A) and
another portfolio directly below it (point B). This means that, relative to point B, point A
has more return with equal risk.
has more risk with equal return.
, has equal risk with less return.
is less efficient. - correct answer ✔✔has more return with equal risk.
Point A has more return (on the y-axis) with the same risk (x-axis) relative to point B.
A point above the efficient frontier is inefficient. - correct answer ✔✔False
A point above the efficient frontier is unattainable.
Assume each of the asset classes below has the following correlation to small-cap stocks:
Treasury bills: .11
Corporate bonds: .34
Large-cap stocks: .91
Intermediate-term U.S. government bonds: .44
Which one of the following provides the most diversification to small-cap stocks?
Treasury bills
Corporate bonds
Large-cap stocks
Intermediate-term U.S. government bonds - correct answer ✔✔Treasury bills
The correlation farthest from +1.0 gives the greatest diversification. Therefore in this scenario, Treasury
bills provide the most diversification.
A portfolio above the efficient frontier is one that uses leverage. - correct answer ✔✔False
A portfolio above the efficient frontier is one that is unattainable.
