Financial Markets - All Complete Q&A( With Explanations)

Which of the following professions has the highest projected employment for 2024? 1 / 1 point Economist Teacher Financial Advisor Truck driver Correct • Which of the following is NOT a learning objective in this course? 1 / 1 point How we incentivize people to get things done How to make money Regulating financial markets Applying psychology and sociology to finance Correct While you may learn this as a result, learning how to making money is not a theme of the course. • According to Andrew Carnegie, what should somebody do once she is wealthy? 1 / 1 point Retire late to accumulate as much wealth as possible, and then give the wealth away Retire early and commit to philanthropy while young Throw extravagant parties to help her wealth trickle down Pass it on to her children Correct • Why is it relevant that finance tends to attract large amounts of money? 1 / 1 point Money can be used for good or evil Finance attracts people from around the globe Financial markets are a critical components of economic success All of the above Correct Lesson #2 Quiz LATEST SUBMISSION GRADE 100% • A stress test: (check all that apply) 1 / 1 point Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises. Correct Tries to incorporate all the interconnections between financial institutions. Correct Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc. Correct Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises. • A 5% 3-month Value At Risk (VaR) of $1 million represents: 1 / 1 point The likelihood of a 5% of $1 million decline in the asset over the next 3-month. A 5% decline in the value of the asset after 3 month, per each $1 million of notional. A 5% chance of the asset increasing in value by $1 million during the 3-month time frame. A 5% chance of the asset declining in value by $1 million during the 3-month time frame. Correct • In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured by: 1 / 1 point The standard deviation of returns. The variance of returns. The Beta. The Alpha. Correct • Market (or systematic) risk whereas idiosyncratic risk 
 1 / 1 point . Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to a specific asset and therefore not the market as a whole Is the risk for an asset to not be able to be traded in the market at a later time Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset Is the risk which is endemic to a specific asset and therefore not the market as a whole Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to the industry of the asset and therefore not the market as a whole Correct • Why might an investor not normally invest large sums of money into Walmart or Apple stock? Their stock prices are highly volatile, and thus carry a lot of risk Their stock prices closely track the S&P500 Both companies have received extensive media coverage The stock prices are very stable, making it difficult to gain large sums of money Correct 
 1 / 1 point • Why is the normal distribution not a good model of some financial data? 1 / 1 point The standard deviation is too low The standard deviation is too high Extreme events occur in it too often It does not have many outliers Correct Most values drawn from a normal distribution are within a few standard deviations of the mean. This is not the case in the S&P500 data, for example. Lession #3 Quiz LATEST SUBMISSION GRADE 100% • Which of these best describes risk pooling? 1 / 1 point Sick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensive If individual events are independent, risk can be decreased by averaging across all of the events Insurance companies must avoid situations whereby customers are incentivized to intentionally cause an incident (e.g. burning their house down) If individual events are not independent, risk can be decreased by averaging across all of the events Correct • Which of the following was NOT a factor which led to the proliferation of life insurance? 1 / 1 point Insurance salespeople Increased life expectancy Statistical data on life expectancy New sales pitches Correct Life insurance was initially designed to provide for the family if the breadwinner passed away, so increased life expectancy has started to eliminate the need for life insurance. • What happens in the United States if your insurance company goes bankrupt? 1 / 1 point There is no protection from the government against insurance company failure Consumers are insured from insurance company failure at the state level Insurance companies are partially owned by the government, and thus are not allowed to fail. Just like the FDIC protects consumers from bank failures, the federal government insures against insurance company failures Correct Insurance against insurance company failure happens at the state level. • What problem does the US Affordable Care Act (“Obamacare”) attempt to address and how does it do so? It addresses moral hazard by allowing hospitals to refuse treatment to those who cannot pay for it. It addresses selection bias by creating a healthcare system which is fully publicly- funded. It addresses moral hazard by forcing hospitals to provide emergency services to those who cannot pay for it. It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty. 
 1 / 1 point Correct Selection bias describes the phenomenon that only people who have an immediate need for insurance will be incentivized to purchase it. • One of the main reasons why many homeowners did not have flood insurance before the advent of Hurricane Katrina in 2005 was: Homeowners thought that the likelihood of a flood was too low to justify buying a flood insurance. Many homeowners were relying on the government instead. Many homeowners were not aware that flood insurance existed in the first place. 
 1 / 1 point Insurance premiums in Louisiana went up by 70% between , causing many people to cancel their insurance. Correct Lesson #4 Quiz LATEST SUBMISSION GRADE 100% • Under the “Don’t put all 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: Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio. Maximize the return of your overall portfolio. Maximize the possibility that good luck for a single investment positively affects your overall portfolio. Increase the uncertainty of your overall portfolio so you can try to generate an extra return. 
 1 / 1 point Correct This is the principle of risk diversification. By spreading the “eggs”, you allow for an under-performing investment to be balanced by another and outperforming one. • Risk diversification can be better achieved: (check all that apply) 1 / 1 point By including in your portfolio all classes of assets traded in the market, independently of their risks. Correct Including all asset classes allows you to “average out” the extent of all potential sources of risk. With only low risk assets in your portfolio. With mutual funds or unit investment trusts if you hold a small number of assets. Correct Diversification for individual assets is harder since you would have to buy fraction of other assets, which could be impossible or prohibitively expensive. With only stocks in your portfolio. • Short selling, which is defined as the sale of a security that the seller has borrowed, is motivated by the belief that: The price of the security will rise. The price of the security will stay the same. Short selling is never prompted by speculation. The price of the security will decline. Correct Buying back the security at a lower price will allow you to make a profit. 
 1 / 1 point • The expected return of a portfolio is computed as and the standard deviation of a portfolio is . 
 1 / 1 point the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset the weighted average of the standard deviations of each individual asset the simple average of the expected returns of each asset in the portfolio NOT the weighted average of the standard deviations of each individual asset the simple average of the expected returns of each asset in the portfolio the weighted average of the standard deviations of each individual asset the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset NOT the weighted average of the standard deviations of each individual asset Correct • An efficient portfolio is a combination of assets which: 1 / 1 point Achieves the highest return for a given risk. Offers a risk free rate of return by minimizing the risk of the portfolio. Minimizes risk by ensuring only diversifiable risk remains. Achieves the highest possible covariance among its assets. Correct Module 1 Honors Quiz LATEST SUBMISSION GRADE 100% • Which of the following are new advancements and changes in finance? 1 / 1 point Behavioral finance Correct Banking Information technology Correct Insurance • What did Andrew Carnegie believe some people succeed in business and others don't? 1 / 1 point The business world selects for people with natural talent The business world selects for people who work hard The business world selects for people with a good education The business world selects for people who get lucky opportunities Correct • The main difference between Value at Risk and Stress Testing is: 1 / 1 point Value at Risk takes a non-statistical approach, as opposed to Stress Testing. Stress Testing takes a non-statistical approach with its scenarios analysis. Value at Risk is not a quantitative approach. There are no differences between the two approaches. Correct • According to the Capital Asset Pricing Model (CAPM), a security with: 1 / 1 point An alpha of zero is able to generate a return which greater than the market return. A positive alpha is considered overpriced, since the security outperforms the market. An alpha of zero is able to generate a return which is inferior to the market return. A positive alpha is considered underpriced, since the security outperforms the market. Correct Remember: Alpha is the constant in the linear relationship between the returns of the security and the returns of the market. • Which of the following are true about fat tail distributions? 1 / 1 point They are a good model for some financial data The mean is a good representation of the distribution They are the best choice for most types of data We must rely on the central limit theorem to gather useful information about them. Correct For example, the daily change in stock price is usually small, but some days (e.g. immediately after a market crash) it can be very large. • If an insurance company has 10000 policies, and each has 0.1 probability of making a claim, what is the standard deviation of the fraction of policies which result in a claim? 
 1 / 1 point 0.003 Correct • Why was the National Association of Insurance Commissioners created? 1 / 1 point To suggest laws that would prevent insurance corporations from becoming “too big to fail” To suggest laws that would decentralize the insurance industry To suggest laws that would decrease the complexity of insurance regulation To suggest laws that would strengthen the insurance industry Correct • Insurance is managed by employers, so if an employee is sick and loses her job, her insurance will be expensive due to preexisting conditions; by contrast, a healthy person who loses his job may not be incentivized to purchase health insurance. This is an example of Moral hazard Selection bias Pooled risk HMO Correct 
 1 / 1 point • 1 / 1 point In addition to earthquake, hurricane and terrorism, which of the following could be categorized as a “disaster” risk? Market liquidity risk A World War Bankruptcy Risk Currency Risk Correct This risk does not emerge from the market but has an impact on it. • One of the mentioned assumptions of portfolio management theory is that investors are rational. A rational investor: Invests only in fully diversified portfolios. Is always averse to risk. Invests in passive funds rather than active funds. Prefers a higher return for a given risk and prefers a lower risk for a given return Correct 
 1 / 1 point • The market portfolio, which includes all traded assets available in the market, must have a beta which is: Equal to 1 Above 1 Negative Equal to 0 Correct The expected return (systematic risk) of a market portfolio is identical to the expected return (systematic risk) of the market as a whole. 
 1 / 1 point • Among the risks associated with short selling a stock are: (check all that apply) Default risk: potential unlimited losses when buying back the stock. Correct There is no upper limit on the price of the stock. Regulatory risk: a ban on short sales can create a surge in the stock price. Correct A surge in the stock price can force the short seller to cover short positions at huge losses. Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed. Correct Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified. • Leveraging your portfolio: (check all that apply) 1 / 1 point Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money. Correct Increases your default risk by magnifying the standard deviation (risk) of your portfolio. Correct By investing more in the risky asset in order to increase your portfolio return, you bear the risk of an asset pricing crash which could prevent you from paying back the money you previously borrowed, hence going bankrupt. Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero. Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified. • You are an investor who wants to form a portfolio that lies to the right of the “optimal” minimum standard deviation portfolio on the efficient frontier. You must: 
 1 / 1 point Invest only in risky securities. Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities. Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio. Invest only in risk-free securities. Correct Lesson #5 Quiz LATEST SUBMISSION GRADE 100% • While discussing what the future of financial markets will look like, the following arguments were mentioned (check all that apply): 
 1 / 1 point Financial markets are likely to stay the way they are now for the next three decades. Financial markets will evolve following simple ideas and ideals, such as the ones historically mentioned by Karl Marx or Robert Owen. It is hard to predict the nature of future financial markets, this evolution will depend on the involvement of young generations within the financial community. Correct It is hard to predict the nature of future financial markets, since human species is the product of a complex evolution. Correct • 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 unlimited liability and lottery tickets is: Asymmetrical. Unlimited liability investors tend to overestimate the minimum probability of loss, whereas in lottery tickets, they overestimate the minimum probability of win. Symmetrical depending on the amount of money involved. For large amounts, both unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss. Symmetrical. Unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss. There is no such comparison between lottery tickets and unlimited liability investors. 
 1 / 1 point Correct • The introduction of inflation indexed debt was motivated by: (check all that apply) 1 / 1 point Historical examples of nominal debt being wiped out in real terms by high inflation. Correct An incentive to hedge from inflation volatility. Correct An incentive to have a debt contract fixed in real terms. Correct The idea to generate profits when inflation is equal to 0. • Why did Chile introduce the Unidad de Fomento ? 1 / 1 point To create a unit of account indexed to inflation, in order to counteract the impact of hyperinflation. To provide stimulus to the economy. To bolster international trade. To replace the peso as the official currency because of hyperinflation. Correct • The concept of equity-protected mortgages consists in: 1 / 1 point Mortgages that include house price insurance. Mortgages that include fire insurance. Mortgages that include accident insurance. Mortgages that include casualty insurance. Correct As an example, if the house price falls below the amount you owe, the mortgage debt will be corrected down. Lesson #6 Quiz LATEST SUBMISSION GRADE 100% • In the S&P 500 forecasting exercise, many subjects seemed to be subject to the representativeness heuristic. This concept of behavioral finance posits that: Most people don’t behave like forecasters, they tend to be affected by their recurring thoughts at the time. Most people don’t behave like forecasters, they tend to interpret new evidence as a confirmation of their existing beliefs or theories. Most people don’t behave like forecasters, what they saw in the past is representative of the future. Most people don’t behave like forecasters, they tend to rely too heavily on the first piece of new information offered when making decisions. 
 1 / 1 point Correct • An efficient market is defined as one in which: 1 / 1 point All participants have the same opportunity to generate the same returns. Asset prices quickly and fully reflect all available information. Asset prices are often in line with the intrinsic value. Transactions are ultimately costless. Correct • The Dividend Discount Model (or Gordon Growth Model) can be stated as follows. Let the investor’s 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: 
 1 / 1 point P = E/(r+g) P = (E*g)/(r) P = E/(r-g) P = (E*r)/(g) Correct The price is the present value of the stock’s future earnings. • Human judgment and experience can play a role in the advent of stock market crash because: Investors with an experience of financial crises are better at staying out of the market in turbulent times. A lot of people who have lived through financial crises have reported that, as a consequence of these crises and their narratives, their faiths in the market have diminished. Investors with an experience of financial crises are better at diversifying their portfolios. 
 1 / 1 point Investors with an experience of financial crises are better at exploiting profit opportunities. Correct Lesson #7 Quiz LATEST SUBMISSION GRADE 100% • Which of the following best describes the “invisible hand”? 1 / 1 point Subtle government economic interventions can lead to the inefficient allocation of resources. The free market, guided by self-interest, is mislead to inefficiently allocate resources. The free market, guided by self-interest, ensures the sufficient production of goods to meet society’s demands. Subtle government economic interventions can ensure the sufficient production of goods to meet society’s demands. Correct • What problems does prospect theory solve? (check all that apply) 1 / 1 point People can underestimate high probabilities and overestimate low probabilities Correct The weighting function shows that there is a difference between the actual probability of an event and the subjective probability People do not treat gambles as equivalent to their expected utility Correct For example, expected utility theory predicts that everyone should take a gamble with a 50% chance of winning $200 and a 50% chance of losing $100, but in practice many people do not take this gamble. People will make big gambles to avoid losses Correct The value function indicates that once people have lost a lot of money, they will be more likely to make risky gambles with the purpose of coming back to their baseline. People will often make purchases impulsively • What is the wishful thinking bias? 1 / 1 point People think that, if they hope for something strongly enough, it will be more likely to happen. People hope that their sports team or political candidate will win People do not consider the probability of the things they want most. People over-estimate probabilities of things they would like to be true. Correct For example, people over-estimate the probability that their favorite sports team or political candidate will win. • Ricardo thinks that, since society seems similar to what it was in the late 1920s, a second Great Depression is coming soon. To which cognitive bias is Ricardo falling victim? The disjunction effect Attention anomalies Representativeness heuristic The framing effect Correct Even though the probability of another Great Depression is low, current conditions seem to fit this single example. 
 1 / 1 point • What is Newcomb’s paradox? 1 / 1 point People will behave differently if playing games against a computer compared to playing them with a human opponent. People sometimes change their behavior when they learn about a prediction which has been made about the future. People prefer a small chance at winning $1 million than a high chance of winning $1000. People behave irrationally when faced with decisions which involve large sums of money. Correct • Which of the following is NOT a common trait of somebody with Antisocial Personality Disorder? Lack of desire to interact with others Heightened self-esteem 
 1 / 1 point Manipulative Lack of empathy Correct Those with Antisocial Personality Disorder like to manipulate, not avoid, others. Module 2 Honors Quiz LATEST SUBMISSION GRADE 100% • A limited liability corporation in which you are a shareholder has just gone bankrupt. The company has a large debt, that is its liabilities are far in excess of its assets. Hence, you will be called on to pay: A proportional share of all creditor claims based on the number of common shares that you own. A proportion of the total debt, which is decided at the discretion of the bankruptcy judge. An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation. Nothing. Correct You are a limited liability investor, hence you are not liable for the debt of the firm. You will at most lose the value of your shares. 
 1 / 1 point • The inflation risk, which inflation indexation aims to mitigate (check all that apply) 1 / 1 point Is associated with any investment that involves cash flows over time. Correct Is the risk that the cash flow from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation. Correct Is the risk that the nominal rate of return of an investment will exceed the rate of inflation. Is not the risk that there will be inflation, it is the risk that inflation will significantly fluctuate over time. Correct • The concept of human capital risk (check all that apply): 1 / 1 point Is a risk associated with the present value of all your future wages. Correct Is not correlated with professional competency. Is not correlated with the stock market. Can also be considered as a protection against inflation. Correct • The random walk hypothesis of the Efficient Market Theory posits that: 1 / 1 point Historical stock prices follow a random walk. Stock price volatility follows a random walk. Historical stock returns follow a random walk. Short-term investment returns are inherently unpredictable. Correct • Suppose a market is inefficient. As new information is received about an asset: 1 / 1 point Investors will short the stock. The volatility (standard deviation) of the stock price will increase. There will be a lag in the adjustment of the stock price. Nothing will happen. Correct In an efficient market, the stock price will be instantaneously updated after new information is received. • Investors mainly use the price-to-earnings (P/E) ratio in order to: 1 / 1 point Decide how much profit a company is likely to make in the future. Determine the optimal risk-return ratio. Decide whether a company’s shares are overpriced or underpriced. Determine the optimal price for the company’s products. Correct For instance, a high P/E ratio can imply that the shares are overpriced with respect to the company’s fundamental value. • What is the shape of the value function in prospect theory? 1 / 1 point Gains: concave up; Losses: concave up Gains: concave up, Losses: concave down Gains: concave down; Losses: concave up Gains: concave down; Losses: concave down Correct Since gains are concave up, gaining $2000 on one day has a lower value than gaining $1000 on two separate days. Since losses are concave down, losing $20000 on one day has a higher value than losing $1000 on two separate days. • Which of the following provide evidence that investors experience cognitive dissonance? 1 / 1 point Investors buy and sell stocks very rapidly Investors choose investments which already have many other investors Investors do not remember the negative performance of their investments. Correct They selectively remember when their investments were doing well. Thus, they still feel they made a good decision. Investors hold onto funds that are doing poorly Correct If they initially chose to invest in the fund, they selectively ignore evidence that their choice was wrong. • Which of the following situations are examples of the framing effect? (check all that apply) 1 / 1 point An elevator lists a maximum capacity of 2000 lbs, even though it can safely carry up to 5000 lbs. A mattress which costs $1000 is advertised as $4000 with a