Risk Management Test Bank
Course Introduction
Risk Management is a comprehensive course that introduces students to the principles, frameworks, and techniques used to identify, assess, and mitigate risks across various organizational contexts. Covering both qualitative and quantitative approaches, the course examines sources of risk, such as financial, operational, strategic, and compliance-based threats, and explores tools like risk assessment matrices, scenario analysis, and risk transfer mechanisms. Emphasis is placed on developing practical strategies for risk analysis, communication, decision-making, and the implementation of effective risk management plans to safeguard organizational assets and ensure business continuity.
Recommended Textbook Investments 11th Edition by Zvi Bodie
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28 Chapters
2129 Verified Questions
2129 Flashcards
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Chapter 1: The Investment Environment
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Sample Questions
Q1) Which of the following portfolio construction methods starts with asset allocation?
A) Top-down
B) Bottom-up
C) Middle-out
D) Buy and hold
E) Asset allocation
Answer: A
Q2) Financial assets
A) directly contribute to the country's productive capacity.
B) indirectly contribute to the country's productive capacity.
C) contribute to the country's productive capacity, both directly and indirectly.
D) do not contribute to the country's productive capacity, either directly or indirectly.
E) are of no value to anyone.
Answer: B
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) You purchased a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss?
A) $1375.00
B) -$1375.00
C) -$27.50
D) $27.50
Answer: A
Q2) In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs
A) by adjusting the divisor.
B) automatically.
C) by adjusting the numerator.
D) quarterly on the last trading day of each quarter.
Answer: B
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Chapter
3: How Securities Are Traded
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Sample Questions
Q1) Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?
A) 40.5%
B) 20.5%
C) 35.5%
D) 23.5%
Answer: D
Q2) A sale by IBM of new stock to the public would be a(n)
A) short sale.
B) seasoned equity offering.
C) private placement.
D) secondary-market transaction.
E) initial public offering.
Answer: B
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) The Profitability Fund had NAV per share of $17.50 on January 1, 2016. On December 31 of the same year, the fund's NAV was $19.47. Income distributions were $0.75, and the fund had capital gain distributions of $1.00. Without considering taxes and transactions costs, what rate of return did an investor receive on the Profitability Fund last year?
A) 11.26%
B) 15.54%
C) 16.97%
D) 21.26%
E) 9.83%
Q2) Differences between hedge funds and mutual funds are that
A) hedge funds are only subject to minimal SEC regulation.
B) hedge funds are typically open only to wealthy or institutional investors.
C) hedge fund managers can pursue strategies not available to mutual funds, such as short selling, heavy use of derivatives, and leverage.
D) hedge funds are commonly structured as private partnerships.
E) All of the options.
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Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) If the annual real rate of interest is 3.5%, and the expected inflation rate is 3.5%, the nominal rate of interest would be approximately
A) 0%.
B) 3.5%.
C) 12.25%.
D) 7%.
Q2) If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be
A) 0.08.
B) 0.03.
C) 0.20.
D) 0.11.
E) 0.25.
Q3) Other things equal, an increase in the government budget deficit
A) drives the interest rate down.
B) drives the interest rate up.
C) might not have any effect on interest rates.
D) increases business prospects.
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate Of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081.
If you want to form a portfolio with an expected rate of return of 0.10, what percentages of your money must You invest in the T-bill, X, and Y, respectively, if you keep X and Y in the same proportions to each other as in Portfolio P?
A) 0.25; 0.45; 0.30
B) 0.19; 0.49; 0.32
C) 0.32; 0.41; 0.27
D) 0.50; 0.30; 0.20
E) Cannot be determined.
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Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) Security M has expected return of 17% and standard deviation of 32%. Security S has expected return of 13% and standard deviation of 19%. If the two securities have a correlation coefficient of 0.78, what is their Covariance?
A) 0.038
B) 0.049
C) 0.047
D) 0.045
E) 0.054
Q2) For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?
A) +1.00
B) +0.50
C) 0.00
D) -1.00
E) None of the options are correct.
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Chapter 8: Index Models
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Sample Questions
Q1) Suppose the following equation best describes the evolution of over time: <sub>t</sub> = 0.4 + 0.6 <sub>t</sub> <sub>- 1</sub>.
If a stock had a of 0.9 last year, you would forecast the to be _______ in the coming year.
A) 0.45
B) 0.60
C) 0.70
D) 0.94
Q2) Rosenberg and Guy found that ___________ helped to predict firms' betas.
A) debt/asset ratios
B) market capitalization
C) variance of earnings
D) all of the options
E) None of the options are correct.
Q3) The index model was first suggested by A) Graham.
B) Markowitz.
C) Miller.
D) Sharpe.
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Page 10
Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function Of
A) market risk.
B) unsystematic risk.
C) unique risk.
D) reinvestment risk.
E) None of the options are correct.
Q2) According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have
A) positive betas.
B) zero alphas.
C) negative betas.
D) positive alphas.
Q3) The capital asset pricing model assumes
A) all investors are price takers.
B) all investors have the same holding period.
C) investors have homogeneous expectations.
D) all investors are price takers and have the same holding period.
E) all investors are price takers, have the same holding period, and have homogeneous expectations.
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Chapter 10: Arbitrage Pricing Theory and Multifactor Models of
Risk and Return
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Sample Questions
Q1) Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios have expected returns of 15% and 6%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%.
A) 15.2%
B) 14.1%
C) 13.3%
D) 10.7%
E) 8.4%
Q2) Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return?
A) 7.0%
B) 8.0%
C) 9.2%
D) 13.0%
E) 13.2%
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) Basu (1977, 1983) found that firms with high P/E ratios
A) earned higher average returns than firms with low P/E ratios.
B) earned the same average returns as firms with low P/E ratios.
C) earned lower average returns than firms with low P/E ratios.
D) had higher dividend yields than firms with low P/E ratios.
Q2) Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of 1.2% yesterday. This suggests that
A) the market is not efficient.
B) Nicholas' stock will probably rise in value tomorrow.
C) investors expected the earnings increase to be larger than what was actually announced.
D) investors expected the earnings increase to be smaller than what was actually announced.
E) earnings are expected to decrease next quarter.
Q3) Basu (1977, 1983) found that firms with low P/E ratios
A) earned higher average returns than firms with high P/E ratios.
B) earned the same average returns as firms with high P/E ratios.
C) earned lower average returns than firms with high P/E ratios.
D) had higher dividend yields than firms with high P/E ratios.
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) ____________ measures the extent to which a security has outperformed or underperformed either the market as a whole or its particular industry.
A) Put call ratio
B) Trin ratio
C) Breadth
D) Relative strength
E) All of the options are correct.
Q2) Information processing errors consist of I) forecasting errors.
II) overconfidence.
III) conservatism.
IV) framing.
A) I and II
B) I and III
C) III and IV
D) IV only
E) I, II, and III
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Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) Strongest evidence in support of the CAPM has come from demonstrating that
A) the market beta is equal to 1.0.
B) nonsystematic risk has significant explanatory power in estimating security returns.
C) the average return beta relationship is highly significant.
D) the intercept in tests of the excess returns beta relationship is exactly zero.
E) professional investors do not generally outperform market indexes, demonstrating that the market is efficient.
Q2) Tests of multifactor models indicate
A) the single factor model has better explanatory power in estimating security returns.
B) macroeconomic variables have no explanatory power in estimating security returns.
C) it may be possible to hedge some economic factors that affect future consumption risk with appropriate portfolios.
D) multifactor models do not work.
E) None of the options are correct.
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) A CDS is a
A) command duty supervisor.
B) collateralized debt security.
C) commercial debt servicer.
D) collateralized debenture security.
E) credit default swap.
Q2) A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are
A) 1.0% and 1.2%.
B) 0.5% and .7%.
C) 1.2% and 1.0%.
D) 0.7% and 0.5%.
E) None of the options are correct.
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Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) The yield curve is a component of
A) the Dow Jones Industrial Average.
B) the consumer price index.
C) the index of leading economic indicators.
D) the producer price index.
E) the inflation index.
Q2) Treasury STRIPS are
A) securities issued by the Treasury with very long maturities.
B) extremely risky securities.
C) created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D) created by pooling mortgage payments made to the Treasury.
Q3) If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows),
A) arbitrage would probably occur.
B) arbitrage would probably not occur.
C) the FED would adjust interest rates.
D) None of the options are correct.
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Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Ceteris paribus, the duration of a bond is positively correlated with the bond's A) time to maturity.
B) coupon rate.
C) yield to maturity.
D) All of the options are correct.
E) None of the options are correct.
Q2) Interest-rate risk is important to
A) active bond portfolio managers.
B) passive bond portfolio managers.
C) both active and passive bond portfolio managers.
D) neither active nor passive bond portfolio managers.
E) obsessive bond portfolio managers.
Q3) The duration of a perpetuity with a yield of 8% is
A) 13.50 years.
B) 12.11 years.
C) 6.66 years.
D) Cannot be determined
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Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) A firm in an industry that is very sensitive to the business cycle will likely have a stock beta
A) -greater than 1.0.
B) equal to 1.0.
C) less than 1.0 but greater than 0.0.
D) equal to or less than 0.0.
E) There is no relationship between beta and sensitivity to the business cycle.
Q2) If the currency of your country is depreciating, the result should be to ______ exports and to _______ imports.
A) increase; increase
B) -increase; decrease
C) decrease; increase
D) decrease; decrease
E) not affect; not affect
Q3) 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.
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Chapter 18: Equity Valuation Models
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Sample Questions
Q1) You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X
A) will be greater than the intrinsic value of stock Y.
B) will be the same as the intrinsic value of stock Y.
C) will be less than the intrinsic value of stock Y.
D) will be the same or greater than the intrinsic value of stock Y.
E) None of the options are correct.
Q2) Since 1955, Treasury bond yields and earnings yields on stocks have been A) identical.
B) negatively correlated.
C) positively correlated.
D) uncorrelated.
Q3) _________ is equal to common shareholders'equity divided by common shares outstanding.
A) Book value per share
B) Liquidation value per share
C) Market value per share
D) Tobin's Q
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Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,
A) the original and restated P/E ratios were quite similar.
B) the original and restated P/E ratios varied considerably.
C) most variation was explained by tax differences.
D) most firms were consistent in their treatment of goodwill.
Q2) A measure of asset utilization is
A) sales divided by working capital.
B) return on total assets.
C) return on equity capital.
D) operating profit divided by sales.
E) None of the options are correct.
Q3) A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is
A) 11.18%.
B) 8.97%.
C) 11.54%.
D) 12.62%.
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Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) The maximum loss a buyer of a stock put option can suffer is equal to
A) the striking price minus the stock price.
B) the stock price minus the value of the call.
C) the put premium.
D) the stock price.
E) None of the options are correct.
Q2) Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A) increases to $204.
B) decreases to $190.
C) increases to $206.
D) decreases to $196.
E) None of the options are correct.
Q3) A put option on a stock is said to be at the money if
A) the exercise price is higher than the stock price.
B) the exercise price is less than the stock price.
C) the exercise price is equal to the stock price.
D) the price of the put is higher than the price of the call.
E) the price of the call is higher than the price of the put.
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Chapter 21: Option Valuation
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Sample Questions
Q1) Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price?
A) Portfolio B
B) Portfolio A
C) The two portfolios have the same exposure.
D) Portfolio A if the stock price increases, and portfolio B if it decreases
E) Portfolio B if the stock price increases, and portfolio A if it decreases
Q2) A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A) +$700
B) $850
C) $580
D) $520
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23
Chapter 22: Futures Markets
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Sample Questions
Q1) Given a stock index with a value of $1,000, an anticipated dividend of $30, and a risk-free rate of 6%, what should be the value of one futures contract on the index?
A) $943.40
B) $970.00
C) $1,030.00
D) $915.09
E) $1,000.00
Q2) An increase in the basis will __________ a long hedger and __________ a short hedger.
A) hurt; benefit
B) hurt; hurt
C) benefit; hurt
D) benefit; benefit
E) benefit; have no effect upon
Q3) To hedge a short position in Treasury bonds, an investor would most likely
A) ignore interest rate futures.
B) buy S&P futures.
C) buy interest rate futures.
D) sell Treasury bonds in the spot market.
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Page 24
Chapter 23: Futures, Swaps, and Risk Management
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Sample Questions
Q1) Which one of the following stock index futures has a multiplier of 25 euros times the index?
A) FTSE 100
B) Hang Seng
C) Nikkei
D) DAX-30
E) FTSE 100 and Hang Seng
Q2) Which one of the following stock index futures has a multiplier of $50 times the index value?
A) Russell 2000
B) FTSE 100
C) Nikkei
D) NASDAQ 100
E) Mini-Russell 2000 and NASDAQ 100
Q3) Commodity futures pricing
A) must be related to spot prices.
B) includes cost of carry.
C) converges to spot prices at maturity.
D) All of the options are correct.
E) None of the options.
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Chapter 24: Portfolio Performance Evaluation
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Sample Questions
Q1) Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.
Q2) In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is
A) internal rate of return.
B) arithmetic average.
C) dollar weighted.
D) time weighted.
E) None of the options are correct.
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26
Chapter 25: International Diversification
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Sample Questions
Q1) The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called
A) foreign exchange risk.
B) political risk.
C) translation exposure.
D) hedging risk.
Q2) __________ are mutual funds that invest in one country only.
A) ADRs
B) ECUs
C) Single-country funds
D) All of the options are correct.
E) None of the options are correct.
Q3) __________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.
A) Default risk
B) Foreign exchange risk
C) Market risk
D) Political risk
E) None of the options are correct.
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Page 27
Chapter 26: Hedge Funds
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Sample Questions
Q1) Hedge fund strategies can be classified as
A) directional or nondirectional.
B) stock or bond.
C) arbitrage or speculation.
D) stock or bond and arbitrage or speculation.
E) directional or nondirectional and stock or bond.
Q2) Hedge funds are prohibited from investing or engaging in
A) distressed firms.
B) convertible bonds.
C) currency speculation.
D) merger arbitrage.
E) None of the options are correct.
Q3) ______ 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 are correct.
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Page 28
Chapter 27: The Theory of Active Portfolio Management
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Sample Questions
Q1) Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active Portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to Invest in the active portfolio is A) 0%.
B) 25%.
C) 50%.
D) 100%.
Q2) Benchmark risk is defined as
A) the return difference between the portfolio and the benchmark. B) the standard deviation of the return of the benchmark portfolio.
C) the standard deviation of the return difference between the portfolio and the benchmark.
D) the standard deviation of the return of the actively-managed portfolio.
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
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Sample
Questions
Q1) The CFA Institute divides the process of portfolio management into three main elements, which are ______, ______, and ______.
A) planning; execution; results
B) security selection; asset allocation; action
C) planning; asset allocation; feedback
D) planning; execution; feedback
E) risk tolerance; feedback; action
Q2) The first step a pension fund should take before beginning to invest is to
A) establish investment objectives.
B) develop a list of investment managers with superior records to interview.
C) establish asset allocation guidelines.
D) decide between active and passive management.
Q3) The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.
A) broader; more risk averse
B) broader; less risk averse
C) more limited; more risk averse
D) more limited; less risk averse
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