Risk Management Exam Materials
Course Introduction
Risk Management is a critical course that explores the identification, assessment, and mitigation of various risks facing organizations, projects, and individuals. The curriculum covers fundamental concepts such as risk analysis, qualitative and quantitative assessment methods, and the development of risk mitigation strategies. Students will learn to address operational, financial, strategic, and compliance risks by evaluating case studies and real-world scenarios. By the end of the course, participants will have a comprehensive understanding of risk management frameworks, regulatory requirements, and best practices that enhance organizational resilience and support sound decision-making.
Recommended Textbook Investments 10th Edition by Zvi Bodie
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28 Chapters
2186 Verified Questions
2186 Flashcards
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Page 2
Chapter 1: The Investment Environment
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58 Flashcards
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Sample Questions
Q1) Theoretically, takeovers should result in
A)improved management.
B)increased stock price.
C)increased benefits to existing management of taken-over firm.
D)improved management and increased stock price.
E)All of the options
Answer: D
Q2) During the period between 2000 and 2002, a large number of scandals were uncovered.Most of these scandals were related to I) manipulation of financial data to misrepresent the actual condition of the firm.
II) misleading and overly optimistic research reports produced by analysts.
III) allocating IPOs to executives as a quid pro quo for personal favors.
IV) greenmail.
A)II, III, and IV
B)I, II, and IV
C)II and IV
D)I, III, and IV
E)I, II, and III
Answer: E
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3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The ____ index represents the performance of the Hong Kong stock market.
A)DAX
B)FTSE
C)Nikkei
D)Hang Seng
Answer: D
Q2) You purchased a futures contract on corn at a futures price of 350, and at the time of expiration the price was 352.What was your profit or loss
A)$2.00
B)-$2.00
C)$100
D)-$100
Answer: C
Q3) The bid price of a T-bill in the secondary market is
A)the price at which the dealer in T-bills is willing to sell the bill.
B)the price at which the dealer in T-bills is willing to buy the bill.
C)greater than the asked price of the T-bill.
D)the price at which the investor can buy the T-bill.
E)never quoted in the financial press.
Answer: B
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25 per share The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A)20.47%
B)25.63%
C)57.14%
D)77.23%
Answer: C
Q2) You purchased 100 shares of XON common stock on margin at $60 per share.Assume the initial margin is 50% and the maintenance margin is 30%.Below what stock price level would you get a margin call Assume the stock pays no dividend; ignore interest on margin.
A)$42.86
B)$50.75
C)$49.67
D)$80.34
Answer: A
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5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) You purchased shares of a mutual fund at a price of $17 per share at the beginning of the year and paid a front-end load of 5.0%.If the securities in which the fund invested increased in value by 12% during the year, and the fund's expense ratio was 1.0%, your return if you sold the fund at the end of the year would be
A)4.75%.
B)5.45%.
C)5.65%.
D)4.39%.
Q2) Which of the following statements about money market mutual funds is true
A)They invest in commercial paper, CDs, and repurchase agreements.
B)They usually offer check-writing privileges.
C)They are highly leveraged and risky.
D)They invest in commercial paper, CDs, and repurchase agreements, and they usually offer check-writing privileges.
E)All of the options are true.
Q3) Discuss the consistency of mutual fund performance results, as studied by Goetzmann and Ibbotson (1994) and Malkiel (1995).
Q4) Discuss the taxation of mutual fund income.
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Page 6
Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year
A)5%
B)10%
C)7%
D)3%
Q2) Over the past year you earned a nominal rate of interest of 3.6% on your money.The inflation rate was 3.1% over the same period.The exact actual growth rate of your purchasing power was
A)3.6%.
B)3.1%.
C)0.48%.
D)6.7%.
Q3) Discuss the historical distributions of each of the following in terms of their average return and the dispersion of their returns: U.S.small company stocks, U.S.large company stocks, and U.S.long-term government bonds.Would any of these investments cause a loss in purchasing power during a 1926-2009 holding period
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.
A)0.114; 0.126
B)0.087; 0.068
C)0.095; 0.113
D)0.087; 0.124
E)None of the options
Q2) Which of the following statements is(are) true
I. Risk-averse investors reject investments that are fair games.
II. Risk-neutral investors judge risky investments only by the expected returns.
III. Risk-averse investors judge investments only by their riskiness.
IV. Risk-loving investors will not engage in fair games.
A)I only
B)II only
C)I and II only
D)II and III only
E)II, III, and IV only
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8
Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) The efficient frontier of risky assets is
A)the portion of the investment opportunity set that lies above the global minimum variance portfolio.
B)the portion of the investment opportunity set that represents the highest standard deviations.
C)the portion of the investment opportunity set that includes the portfolios with the lowest standard deviation.
D)the set of portfolios that have zero standard deviation.
Q2) Theoretically, the standard deviation of a portfolio can be reduced to what level
Explain.Realistically, is it possible to reduce the standard deviation to this level Explain.
Q3) A two-asset portfolio with a standard deviation of zero can be formed when
A)the assets have a correlation coefficient less than zero.
B)the assets have a correlation coefficient equal to zero.
C)the assets have a correlation coefficient greater than zero.
D)the assets have a correlation coefficient equal to one.
E)the assets have a correlation coefficient equal to negative one.
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Chapter 8: Index Models
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Sample Questions
Q1) The single-index model
A)greatly reduces the number of required calculations relative to those required by the Markowitz model.
B)enhances the understanding of systematic versus nonsystematic risk.
C)greatly increases the number of required calculations relative to those required by the Markowitz model.
D)greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk.
E)enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model.
Q2) One "cost" of the single-index model is that it
A)is virtually impossible to apply.
B)prohibits specialization of efforts within the security analysis industry.
C)requires forecasts of the money supply.
D)is legally prohibited by the SEC.
E)allows for only two kinds of risk-macro risk and micro risk.
Q3) Discuss a commonly used adjustment technique to provide an adjusted beta.
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Page 10
Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4% and the expected market rate of return is 11%.Your company has a beta of 0.75 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be A)4%.
B)9.25%.
C)15%.
D)11%.
E)0.75%.
Q2) Your opinion is that Boeing has an expected rate of return of 0.112.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is A)underpriced.
B)overpriced.
C)fairly priced.
D)Cannot be determined from data provided.
Q3) Discuss the mutual fund theorem.
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Page 11
Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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80 Flashcards
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Sample Questions
Q1) Consider the one-factor APT.The variance of returns on the factor portfolio is 9%.The beta of a well-diversified portfolio on the factor is 1.25.The variance of returns on the well-diversified portfolio is approximately
A)3.6%.
B)6.0%.
C)7.3%.
D)14.1%.
Q2) Consider the single factor APT.Portfolio A has a beta of 0.2 and an expected return of 13%.Portfolio B has a beta of 0.4 and an expected return of 15%.The risk-free rate of return is 10%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.
A)A, A
B)A, B
C)B, A
D)B, B
Q3) Name three variables that Chen, Roll, and Ross used to measure the impact of macroeconomic factors on security returns.Briefly explain the reasoning behind their model.
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) The difference between a random walk and a submartingale is the expected price change in a random walk is ______, and the expected price change for a submartingale is ______.
A)positive; zero
B)positive; positive
C)positive; negative
D)zero; positive
E)zero; zero
Q2) The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be
A)between 50% and 70%.
B)between 25% and 50%.
C)between 10% and 25%.
D)less than 10%.
E)greater than 70%.
Q3) Discuss the various forms of market efficiency.Include in your discussion the information sets involved in each form and the relationships across information sets and across forms of market efficiency.Also discuss the implications for the various forms of market efficiency for the various types of securities' analysts.
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns.
A)less; superior
B)less; inferior
C)more; superior
D)more; inferior
Q2) Barber and Odean (2001) report that women trade __________ frequently than men.
A)less
B)less in down markets
C)more in up markets
D)more
Q3) Single men trade far more often than women.This is due to greater ________ among men.
A)framing
B)regret avoidance
C)overconfidence
D)conservatism
Q4) Discuss what technical analysis is, what technical analysts do, and the relationship between technical analysis, fundamental analysis, and behavioral finance.
Page 14
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Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) A major finding by Heaton and Lucas (2000) is that
A)the market rate of return does not help explain the rate of return of individual securities and CAPM must be rejected.
B)the market rate of return does explain the rate of return of individual securities.
C)the change in proprietary wealth helps explain the rate of return of individual securities.
D)the market rate of return does not help explain the rate of return of individual securities and CAPM must be rejected, but the change in proprietary wealth helps explain the rate of return of individual securities.
E)None of the options
Q2) One way that Black, Jensen and Scholes overcame the problem of measurement error was to
A)group securities into portfolios.
B)use a two-stage regression methodology.
C)reduce the precision of beta estimates.
D)set alpha equal to one.
E)None of the options
Q3) Describe some of the ways the CAPM is applied in practice.
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) CDOs are divided in tranches
A)that provide investors with securities with varying degrees of credit risk.
B)and each tranch is given a different level of seniority in terms of its claims on the underlying pool.
C)and none of the tranches is risky.
D)and equity tranch is very low risk.
E)that provide investors with securities with varying degrees of credit risk, and each tranch is given a different level of seniority in terms of its claims on the underlying pool.
Q2) To earn a high rating from the bond rating agencies, a firm should have
A)a low times interest earned ratio.
B)a low debt to equity ratio.
C)a high quick ratio.
D)a low debt to equity ratio and a high quick ratio.
E)a low times interest earned ratio and a high quick ratio.
Q3) A credit default swap is
A)a fancy term for a low-risk bond.
B)an insurance policy on the default risk of a federal government bond or loan.
C)an insurance policy on the default risk of a corporate bond or loan.
D)None of the options
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Page 16
Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n - 1 - period zero-coupon bond rolled over into a one-year bond in year n is defined as
A)the forward rate.
B)the short rate.
C)the yield to maturity.
D)the discount rate.
E)None of the options
Q2) The yield curve shows at any point in tim
A)the relationship between the yield on a bond and the duration of the bond.
B)the relationship between the coupon rate on a bond and time to maturity of the bond.
C)the relationship between yield on a bond and the time to maturity on the bond.
D)All of the options
E)None of the options
Q3) Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.
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Page 17
Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) A 6%, 30-year corporate bond was recently being priced to yield 8%.The Macaulay duration for the bond is 8.4 years.Given this information, the bond's modified duration would be
A)8.05.
B)9.44.
C)9.27.
D)7.78.
Q2) A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points, how much change will there be in the bond's price
A)1.85%
B)2.91%
C)3.27%
D)6.44%
Q3) Ceteris paribus, the duration of a bond is negatively correlated with the bond's A)time to maturity.
B)coupon rate.
C)yield to maturity.
D)coupon rate and yield to maturity.
E)None of the options
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Page 18
Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) The emerging stock market exhibiting the highest local currency return in 2012 was A)Thailand.
B)China.
C)Singapore.
D)Mexico.
E)Brazil.
Q2) A firm in the early stages of the industry life cycle will likely have
A)high market penetration.
B)high risk.
C)rapid growth.
D)high market penetration and rapid growth.
E)high risk and rapid growth.
Q3) An example of a defensive industry is
A)the automobile industry.
B)the tobacco industry.
C)the food industry.
D)the automobile industry and the tobacco industry.
E)the tobacco industry and the food industry.
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Chapter 18: Equity Valuation Models
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Sample Questions
Q1) WACC is the most appropriate discount rate to use when applying a ______ valuation model.
A)FCFF
B)FCFE
C)DDM
D)FCFF or DDM depending on the debt level of the firm
E)P/E
Q2) A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A)$0.275
B)$27.50
C)$31.82
D)$56.25
Q3) Describe the free cash flow approach to firm valuation.How does it compare to the dividend discount model (DDM)
Q4) Discuss the Gordon, or constant discounted dividend, model of common stock valuation.Include in your discussion the advantages, disadvantages, and assumptions of the model.
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Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.
A)understate; overstate
B)understate; understate
C)overstate; understate
D)overstate; overstate
E)There is no discernable pattern.
Q2) A firm has a lower asset turnover ratio than the industry average, which implies
A)the firm has a lower P/E ratio than other firms in the industry.
B)the firm is less likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is less profitable than other firms in the industry.
D)the firm is utilizing assets less efficiently than other firms in the industry.
E)the firm has lower spending on new fixed assets than other firms in the industry.
Q3) The DuPont system decomposes ROE into the following components:
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21
Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even
A)$101
B)$102
C)$103
D)$104
E)None of the options
Q2) The current market price of a share of MOT stock is $24.If a call option on this stock has a strike price of $24, the call
A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options
Q3) Describe the protective put.What are the advantages of such a strategy
Q4) List three types of exotic options and describe their characteristics.
Q5) Discuss the differences in writing covered and naked calls.Are risks involved in the two strategies similar or different Explain.
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Chapter 21: Option Valuation
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Sample Questions
Q1) In volatile markets, dynamic hedging may be difficult to implement because A)prices move too quickly for effective rebalancing.
B)as volatility increases, historical deltas are too low.
C)price quotes may be delayed so that correct hedge ratios cannot be computed.
D)volatile markets may cause trading halts.
E)All of the options
Q2) The intrinsic value of an out-of-the-money put option is equal to
A)the stock price minus the exercise price.
B)the put premium.
C)zero.
D)the exercise price minus the stock price.
Q3) As the underlying stock's price increased, the call option valuation function's slope approaches A)zero.
B)one.
C)two times the value of the stock.
D)one-half times the value of the stock.
E)infinity.
Q4) Discuss the relationship between option prices and time to expiration, volatility of the underlying stocks, and the exercise price.
Page 23
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Chapter 22: Futures Markets
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Q1) On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550.If on June 15 the futures price were 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)
A)$1,550 loss
B)$15,550 loss
C)$15,550 profit
D)$1,550 profit
Q2) You bought one soybean future contract at $5.13 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel Assume the contract size is 5,000 ounces and there are no transactions costs.
A)$65 profit
B)$650 profit
C)$650 loss
D)$65 loss
Q3) Discuss marking to market and margin accounts in the futures market.
Q4) You purchased the following futures contract today at the settlement price listed in the Wall Street Journal.Answer the questions below regarding the contract.
Q5) Describe the differences between futures and forward contracts.
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Chapter 23: Futures, Swaps, and Risk Management
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Q1) Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index
A)FTSE 100
B)Hang Seng
C)Nikkei
D)DAX-30
E)FTSE 100 and Hang Seng
Q2) If a stock index futures contract is overpriced, you would exploit this situation by
A)selling both the stock index futures and the stocks in the index.
B)selling the stock index futures and simultaneously buying the stocks in the index.
C)buying both the stock index futures and the stocks in the index.
D)buying the stock index futures and selling the stocks in the index.
E)None of the options
Q3) Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes, one favorable and one unfavorable.
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Chapter 24: Portfolio Performance Evaluation
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Q1) Rodney holds a portfolio of risky assets that represents his entire risky investment.To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed
I. Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio.
II. State your conclusions.
III. Assume that past security performance is representative of expected performance.
IV. Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy.
A)I, III, IV, II
B)III, IV, I, II
C)IV, III, I, II
D)III, II, I, IV
E)III, I, IV, II
Q2) You invested $1,000 through your broker three years ago.Your account balance at the beginning of each period is shown in the table below.
Q3) Discuss, in general, the performance attribution procedures.
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Chapter 25: International Diversification
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Q1) Home bias refers to
A)the tendency to vacation in your home country instead of traveling abroad.
B)the tendency to believe that your home country is better than other countries.
C)the tendency to give preferential treatment to people from your home country.
D)the tendency to overweight investments in your home country.
E)None of the options
Q2) Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).
Q3) WEBS portfolios
A)are passively managed.
B)are shares that can be sold by investors.
C)are free from brokerage commissions.
D)are passively managed and are shares that can be sold by investors.
E)All of the options.
Q4) Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.
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Chapter 26: Hedge Funds
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Q1) The typical hedge fund fee structure is
A)a management fee of 1% to 2%.
B)an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance.
C)a 12-b1 fee of 1%.
D)a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance.
E)a management fee of 1% to 2% and a 12-b1 fee of 1%.
Q2) ______ bias arises because hedge funds only report returns to database publishers if they want to.
A)Survivorship
B)Backfill
C)Omission
D)Incubation
E)None of the options
Q3) Explain the five major differences between hedge funds and mutual funds.
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Chapter 27: The Theory of Active Portfolio Management
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Q1) The beta of an active portfolio is 1.45.The standard deviation of the returns on the market index is 22%.The nonsystematic variance of the active portfolio is 3%.The standard deviation of the returns on the active portfolio is
A)36.30%.
B)5.84%.
C)19.60%.
D)24.17%.
E)26.0%.
Q2) Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.
A)0.656
B)0.452
C)0.258
D)0.153
E)0.001
Q3) You have a record of an analyst's past forecasts of alpha.Describe how you would use this information within the context of the Treynor-Black model to determine the forecasting ability of the analyst.
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Page 29
Chapter 28: Investment Policy and the Framework of the
Cfa Institute
Available Study Resources on Quizplus for this Chatper
83 Verified Questions
83 Flashcards
Source URL: https://quizplus.com/quiz/52445
Sample Questions
Q1) Assume that at retirement you have accumulated $750,000 in a variable annuity contract.The assumed investment return is 9% and your life expectancy is 25 years.If the first year's actual investment return is 9%, what is the starting benefit payment
A)$30,000.00
B)$33,333.33
C)$76,354.69
D)$52,452.73
E)Cannot tell without additional information
Q2) __________ center on the trade-off between the return the investor wants and how much risk the investor is willing to assume.
A)Investment constraints
B)Investment objectives
C)Investment policies
D)All of the options
E)None of the options
Q3) Discuss investments as a hedge against inflation
Q4) Discuss four factors you would need to include if you were constructing a retirement planning worksheet.
Q5) Discuss some of the advantages "personal funds" have over mutual funds.
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