FIN 321 - EXAM 1 QUESTIONS AND ANSWERS LATEST UPDATE 2025-2026
When you sell a bond at a lower price, the new Coupon Rate is called? - Answers Yield to
Maturity
Are treasury bonds less or more risky? - Answers Less risky
If you earn 0 in Treasuries Risk = ______ - Answers 0 in Return/Risk Free Rate(impacts everyone
equally)
Investments with higher volatility tend to have __________ average returns. - Answers Higher
Which of the following statements is FALSE?
A) Expected return should rise proportionately with volatility.
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to
earn a higher return.
C) Smaller stocks have lower volatility than larger stocks.
D) The largest stocks are typically more volatile than a portfolio of large stocks. - Answers C)
Smaller stocks have lower volatility than larger stocks.
-LARGER stocks have lower volatility overall
Higher standard deviation means? - Answers -More risk
-Higher variance
-Higher volatility
-Very difficult to forecast
Total Risk - Answers The total risk of an investment is measured by the variance, or more
commonly, the standard deviation of its return
How do we protect against risk? - Answers Diversification
What is diversification? - Answers -Individual volatility of stocks
, -Correlation of the stocks
What is left? - Answers Systematic Risk (i.e. Market Risk/Non-diversifiable Risk/Company-Wide)
-Unanticipated events that affect almost all assets to some degree but they are economy wide.
If you own more stocks, can diversification bring the risk to zero? - Answers No
-But the more stocks you add to portfolio, you can bring risk down
-
Systematic Risk Principle - Answers States that the reward for bearing risk depends only on the
systematic risk of an investment. The level of systematic risk in a particular asset, relative to the
average, is given by the beat of that asset. Because non-systematic risk can be eliminated at
virtually no cost (by diversifying), there is no reward for bearing it
How do we measure Systematic Risk? - Answers Beta
Higher Beta/Higher Risk = Higher __________ - Answers Expected Return (only systematic risk
determines expected returns)
In general, it is possible to eliminate ________ risk by holding a large portfolio of assets. -
Answers Non-systematic
-Will always have systematic leftover
Total Return - Answers The total return of an investment has two components: expected return
and the unexpected return. Unexpected return comes about because of unanticipated event.
The risk from investing stems from the possibility of an unanticipated event.
Because investors can eliminate non-systematic risk "for free" by diversifying their portfolios,
they ________ a risk premium for bearing it. Aka the risk premium for diversifiable risk is
_________ - Answers -Do not require; zero
-Investors are not compensated for holding non-systematic risk
Systematic Risk: Diversifiable? Requires a Risk Premium? - Answers No;Yes
When you sell a bond at a lower price, the new Coupon Rate is called? - Answers Yield to
Maturity
Are treasury bonds less or more risky? - Answers Less risky
If you earn 0 in Treasuries Risk = ______ - Answers 0 in Return/Risk Free Rate(impacts everyone
equally)
Investments with higher volatility tend to have __________ average returns. - Answers Higher
Which of the following statements is FALSE?
A) Expected return should rise proportionately with volatility.
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to
earn a higher return.
C) Smaller stocks have lower volatility than larger stocks.
D) The largest stocks are typically more volatile than a portfolio of large stocks. - Answers C)
Smaller stocks have lower volatility than larger stocks.
-LARGER stocks have lower volatility overall
Higher standard deviation means? - Answers -More risk
-Higher variance
-Higher volatility
-Very difficult to forecast
Total Risk - Answers The total risk of an investment is measured by the variance, or more
commonly, the standard deviation of its return
How do we protect against risk? - Answers Diversification
What is diversification? - Answers -Individual volatility of stocks
, -Correlation of the stocks
What is left? - Answers Systematic Risk (i.e. Market Risk/Non-diversifiable Risk/Company-Wide)
-Unanticipated events that affect almost all assets to some degree but they are economy wide.
If you own more stocks, can diversification bring the risk to zero? - Answers No
-But the more stocks you add to portfolio, you can bring risk down
-
Systematic Risk Principle - Answers States that the reward for bearing risk depends only on the
systematic risk of an investment. The level of systematic risk in a particular asset, relative to the
average, is given by the beat of that asset. Because non-systematic risk can be eliminated at
virtually no cost (by diversifying), there is no reward for bearing it
How do we measure Systematic Risk? - Answers Beta
Higher Beta/Higher Risk = Higher __________ - Answers Expected Return (only systematic risk
determines expected returns)
In general, it is possible to eliminate ________ risk by holding a large portfolio of assets. -
Answers Non-systematic
-Will always have systematic leftover
Total Return - Answers The total return of an investment has two components: expected return
and the unexpected return. Unexpected return comes about because of unanticipated event.
The risk from investing stems from the possibility of an unanticipated event.
Because investors can eliminate non-systematic risk "for free" by diversifying their portfolios,
they ________ a risk premium for bearing it. Aka the risk premium for diversifiable risk is
_________ - Answers -Do not require; zero
-Investors are not compensated for holding non-systematic risk
Systematic Risk: Diversifiable? Requires a Risk Premium? - Answers No;Yes
