Risk Management
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Course Introduction
Risk Management explores the identification, assessment, and prioritization of risks in various organizational contexts, followed by coordinated application of resources to minimize, monitor, and control the probability or impact of unforeseen events. The course covers key frameworks and strategies used to address financial, operational, strategic, and hazard risks, focusing on the development of effective risk management plans, regulatory compliance, insurance, and crisis response. Students will analyze real-world case studies and engage in practical exercises to develop critical decision-making and problem-solving skills essential for safeguarding organizational assets and ensuring business continuity.
Recommended Textbook
Investments Analysis and Management 13th Edition by Charles P. Jones
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Chapter 1: Understanding Investments
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Q1) The investment professionals that arrange the sale of new securities are called:
A)arbitragers.
B)traders.
C)investment bankers.
D)specialists.
Answer: C
Q2) The two major considerations in investing are return and timing.
A)True
B)False
Answer: False
Q3) International investing:
A)is only practical for institutional investors.
B)increases the overall risk of a stock portfolio.
C)always leads to higher returns than a domestic portfolio.
D)can reduce risk due to increased diversification.
Answer: D
Q4) What are some of the career opportunities in the investment industry?
Answer: Investment banker,merger and acquisition specialist,security traders,sales people,security analyst,portfolio manager,registered investment advisor and financial planner.
Page 3
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Chapter 2: Investment Alternatives
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Q1) A corporate investor in the 34% marginal income tax bracket can buy bonds issued by a petroleum exploration company yielding 10.606%.The investor should be willing to buy tax-exempt municipal bonds of similar quality yielding what percent or higher?
Answer: 10.606 x (1.0-0.34)= 7.00 percent
Q2) Which of the following statements regarding money market instruments isnot true?
A)They tend to be highly marketable.
B)They have maturities from 1 to 3 years.
C)They tend to have a low probability of default.
D)Their rates tend to move together.
Answer: B
Q3) Which of the following statements is true regarding an investment in mortgage-backed securities?
A)There is little default risk.
B)The stated maturity is generally 10 years.
C)They receive a fixed payment per month.
D)They are not subject to prepayment.
Answer: A
Q4) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
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Chapter 3: Indirect Investing
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Sample Questions
Q1) An investor who buys shares in a closed-end fund for less than the fund's net asset value is said to be buying shares at a _____________________.
Answer: discount
Q2) Net asset value takes into account:
A)both realized and unrealized capital gains.
B)only realized capital gains.
C)only unrealized capital gains.
D)neither realized or unrealized capital gains.
Answer: A
Q3) How is the individual investor's income tax position affected by owning investment company shares compared to owning securities directly?
Answer: An investor holding mutual fund shares will pay taxes on capital gains if the fund sells appreciated securities,even if the investor does not sell any fund shares.However,the investor will pay taxes on dividend income in either case.Investment companies are intermediaries that pass on income and capital gains/losses to the shareholder.
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Chapter 4: Securities Markets and Market Indexes
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Q1) An NYSE market maker awaits news of a merger involving one of the stocksin which she makes a market.Why does she set the bid-ask spread higher?
Q2) What are the major similarities and differences between a specialist and a dealer?
Q3) Investment bankers are compensated by:
A)the underwriting spread.
B)commissions paid by the buyers of the security.
C)commission paid by the sellers of the security.
D)guaranteed investment contracts.
Q4) What impact does the increasing amount of institutional investing have on the securities markets today,and what role do you think institutional investors will play in the future?
Q5) In private placements,new security issues are sold directly to financial institutions. A)True B)False
Q6) The DJIA is a _______-weighted index.
Q7) What is the Nasdaq National Market System?
Q8) What is Instinet and what does it offer for investors?
Page 6
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Chapter 5: How Securities Are Traded
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Q1) Most full-service stockbrokers derive over 80% of their income from customer commissions.
A)True
B)False
Q2) What costs and risks are incurred in using a margin account that are not present in a cash account?
Q3) A trading halt on the NYSE occurs:
A)only when the SEC officially declares one is necessary.
B)when the market declines more than 10 percent during the day.
C)to allow a company to announce important news or where there is a significant order imbalance between buyers and sellers in a security.
D)any time designated market makers exhaust their capital.
Q4) "Circuit breakers" are program traders that attempt to bypass the exchange regulations.
A)True B)False
Q5) What are two methods of investing in stocks without a broker?
Q6) What is insider trading?Does it only affect large investors?
Q7) The SIPC limit for insurance coverage on cash is _____________________.
Page 7
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Chapter 6: The Risks and Returns From Investing
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Q1) The equity risk premium is the difference between the expected return:
A)on stocks and bonds.
B)on high-grade stocks and low-grade stocks.
C)on stocks and the risk-free rate.
D)on a stock market index and the inflation rate.
Q2) What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?
Q3) The returns and risk measures in this chapter are calculated from historical data.Are such measures good predictors of the future?What are some circumstances that could change to impact future return and risk?How can an investor use these return and risk measures to help construct a portfolio?
Q4) What is the best measure of risk for a sole proprietorship?
Q5) It is generally easier to predict interest rate risk than market risk.
A)True
B)False
Q6) Total return is equal to:
A)capital gain + price change.
B)yield + income.
C)capital gain - loss.
D)yield + price change.
Page 8
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Chapter 7: Portfolio Theory
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Q1) The major problem with the Markowitz model is that it requires a full set of ___________ between the asset returns in order to calculate portfolio variance.
Q2) Which of the following statements regarding expected return of a portfolio is true? It can:
A)be higher than the weighted average expected return of the individual assets. B)be lower than the weighted average return of the individual assets.
C)never differ from the weighted average expected return of the individual assets. D)not be calculated.
Q3) The major problem with the Markowitz model is its: A)lack of accuracy.
B)predictability flaws.
C)complexity.
D)inability to handle large number of inputs.
Q4) In a portfolio consisting of two perfectly negatively correlated securities,the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.
A)True
B)False
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) An index commonly used as a proxy for developed market international equities is the:
A)MSCI EAFE Index.
B)MSCI Emerging Markets Index.
C)Russell 1000 Index.
D)FTSE NAREIT Index.
Q2) Which of the following is not true regarding Markowitz portfolio theory?The Markowitz model:
A)is considered a three-parameter model.
B)implies that no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier.
C)is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks.
D)generates an entire set,or efficient frontier,of portfolios.
Q3) Which of the following best approximates the typical correlation between the S&P 500 and the
A)-50%
B)0%
C)25%
D)70%
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) For which of the following models is beta the slope term?
A)Risk-free model
B)CAPM
C)CML
D)Market model
Q2) Securities with betas greater than l should have:
A)greater than average diversifiable risk
B)lower than average diversifiable risk.
C)required returns higher than the market return.
D)no systematic risk.
Q3) Using the separation theorem,it is necessary to match each investor's indifference curves with a particular efficient portfolio.
A)True
B)False
Q4) Unlike the CAPM,the APT does not assume borrowing and lending at the risk-free rate.
A)True
B)False
Q5) What is the formula for the slope of the CML?What does it represent?
Q6) Compare the capital market line and the security market line.
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) Stephen used the dividend discount model to determine that the price of a stock should be $23.50.Stephen checks on the internet and finds the latest price quoted for the stock is $27.00.What should he do?
A)Buy the stock at $27.00
B)Sell the stock at $27.00,or sell short if he does not own it
C)Do nothing,as his estimate of the intrinsic value may be off as much as 15%
D)Buy the stock at $23.50 because that is all it is worth
Q2) No one knows with precision which valuation model to apply for any particular stock.
A)True
B)False
Q3) What are two major approaches used to value stocks?
A)Discounted cash flow techniques and absolute valuation techniques
B)Discounted cash flow techniques and relative valuation techniques
C)Compound free cash flow techniques and relative valuation techniques
D)Markowitz diversification techniques and relative valuation techniques
Q4) Historically,the average P/E for the S&P 500 is approximately 16.
A)True
B)False
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Sector rotation would be very successful in a truly efficient market.
A)True
B)False
Q2) For adequately diversified common stock portfolios,what percent of the variability in returns is accounted for by market effects?
A)30
B)50
C)70
D)90
Q3) Historically,sell-side equity research has tended to assign:
A)very unfavorable ratings to target companies.
B)unfavorable ratings to target companies.
C)favorable ratings to target companies.
D)neutral ratings to target companies.
Q4) Which of the following models provides investors with a method of calculating a required return for a stock?
A)DuPont model
B)Risk premium model
C)Fisher model
D)Capital asset pricing model
Page 13
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Chapter 12: Market Efficiency
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Q1) According to the strong form of the efficient market hypothesis,which investors should expect to earn abnormal returns?
A)Investors with superior analytic ability
B)Investors with access to nonpublic information
C)Investors with access to public and nonpublic information
D)No investors
Q2) Data mining refers to the search for security return patterns by:
A)regressing firm stock returns against firm price multiples.
B)calculating CARs relative to firm earnings announcements.
C)applying various investment techniques to a set of return data.
D)applying filter tests to very large samples of return data.
Q3) Historically,stock returns for companies with low P/E ratios have been better than returns for stocks with high P/E ratios.
A)True
B)False
Q4) "Event studies" study return patterns around specific events such as stock splits or dividend announcements.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) In the U.S. ,since the end of World War II,the typical business cycle consists of an expansion of how many months?
A)10
B)23
C)35
D)57
Q2) Which of the following is included in Gross Domestic Product (GDP)?
A)The value of final goods,only
B)The value of final goods and services,only
C)The value of final goods,services,and labor,only
D)The value of final goods,services,labor,and capital
Q3) The National Bureau of Economic Research (NBER)is:
A)a division of the Department of Commerce of the U.S.Government.
B)an association of academic and professional economic forecasters.
C)a unit within the U.S.Federal Reserve.
D)a private nonprofit organization.
Q4) The longest peacetime expansion ran from 1991 to 2000.
A)True
B)False
Q5) Why do stock investors pay attention to the bond market?
Page 15
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Chapter 14: Industry Analysis
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Questions
Q1) The North American Industry Classification System (NAICS)was developed using a production-oriented approach,resulting in companies being classified into industries based on the activity in which they are primarily engaged.
A)True
B)False
Q2) Which decade is commonly referred to as the "lost decade" due to the poor performance of U.S.stocks?
A)The 1970s
B)The 1980s
C)The 1990s
D)The 2000s
Q3) Which of the following statements about the industry life cycle is incorrect?
A)Companies may stay in one phase for a significant period of time.
B)All industries can be classified accurately into a specific phase.
C)The general framework may not apply to some industries.
D)The approach does not explicitly lead to a stock price determination.
Q4) How can historical performance help the analyst assess the future prospects for an industry?
Q5) When should companies in cyclical industries be bought?
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Chapter 15: Company Analysis
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Q1) Which of the following is true regarding earnings forecasts made by analysts versus forecasts made by statistical models? The evidence tends to:
A)support analysts' forecasts in terms of accuracy over statistical models.
B)support statistical models' forecasts in terms of accuracy over analysts' forecasts.
C)support both types of forecasts equally.
D)not support either type of forecast in terms of accuracy.
Q2) If a company's net income margin decreases,a company can maintain its ROA by increasing its asset turnover.
A)True
B)False
Q3) How could unexpected inflation affect the P/E ratio?
Q4) What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?
Q5) Which of the following statements regarding retained earnings is not true?
A)It is part of stockholders' equity.
B)It represents spendable funds for a company.
C)It designates that part of previous earnings not paid out as dividends.
D)It is irrelevant in security valuation.
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Chapter 16: Technical Analysis
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Q1) Technical analysis utilizes a top-down,fundamental approach to common stock analysis.
A)True
B)False
Q2) Secondary movements are often termed technical corrections.
A)True
B)False
Q3) Which of the following is not one of the three major variables to be decided by the investor in order to construct a moving average?
A)Price to be used
B)Time period to be used
C)Weight to be used
D)Type of moving average to be constructed
Q4) A bar chart is the simplest type of chart used in technical analysis.
A)True
B)False
Q5) How is relative strength calculated and used?
Q6) What are support and resistance levels?
Q7) Explain how profit taking and support levels are related.
Q8) Explain three specific buy signals using a moving average.
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Chapter 17: Bond Yields
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Q1) Assume an investor buys an 8 percent,semi-annual,10-year bond at par.He sells it two years later after market interest rates have decreased to 6 percent.The investor's capital gain is closest to:
A)$41.
B)$124.
C)$126.
D)$149.
Q2) Based on which of the following term structure theories are forward rates most useful?
A)Expectations theory
B)Liquidity preference theory
C)Preferred habitat theory
D)Market segmentation theory
Q3) Yield spreads vary inversely with the: ______________________________.
Q4) Bond traders use the term "basis point" to mean one percentage point in interest rate.
A)True
B)False
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Chapter 18: Bonds: Analysis and Strategy
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Q1) For a zero coupon bond,duration is the same as time to maturity.
A)True
B)False
Q2) A zero-coupon bond has 10-years to maturity and a YTM of 8%.If the YTM instantaneously increases to 9%,what happens to the bond's price and duration?
A)The price decreases and the duration increases.
B)The price increases and the duration decreases.
C)The price decreases and the duration decreases.
D)The price decreases and the duration stays the same.
Q3) Which of the following 10-year,8% bonds will offer the highest YTM?
A)AAA-rated,callable bond
B)AAA-rated,non-callable bond
C)BBB-rated,callable bond
D)BBB-rated,non-callable bond
Q4) Which of the following statements concerning yield spreads is not true?
A)Yield spreads may be positive or negative.
B)Yield spreads are often calculated across bond maturities.
C)Yield spreads are influenced by the level of interest rates in the market.
D)Yield spreads can change over time.
Q5) Why is immunization considered to be a hybrid strategy?
Page 20
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Chapter 19: Options
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Q1) Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?
A)A speculator
B)A call writer
C)A put writer
D)An arbitrageur
Q2) What are the variables in the Black-Scholes option pricing model?How is each related to the price of the call option?
Q3) Options can be purchased on margin.
A)True
B)False
Q4) A call option written against stock owned by the writer is said to be:
A)naked.
B)in the money.
C)out of the money.
D)covered.
Q5) What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?
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Chapter 20: Futures
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Q1) In the case of a futures contract,buyers can settle a contract:
A)only by taking delivery.
B)only by arranging an offsetting contract.
C)either by delivery or offset.
D)by a combination of delivery and offset.
Q2) Which of the following is not a potential advantage of speculating in futures?
A)Leverage
B)Ease of transacting
C)Low transactions costs
D)High and narrow probability distribution of expected returns
Q3) Futures exchange members:
A)trade strictly for their own accounts.
B)trade strictly for others.
C)can trade for their own accounts or for others.
D)are not allowed to trade on the exchange where they are members.
Q4) ?Stock-index futures may be settled either by cash or by delivery of securities.
A)True
B)False
Q5) Explain the difference between a forward contract and a futures contract.
Q6) What is the role of the clearinghouse in futures trading?
Page 22
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Chapter 21: Portfolio Management
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Q1) The Markowitz model identifies the set of portfolios that offers the:
A)highest return for any given level of risk.
B)least-risk for conservative investors.
C)long-run approach to wealth accumulation for young investors.
D)risk-free alternative for risk-averse investors.
Q2) What are the steps in the portfolio management process?
Q3) The components of the investment policy statement (IPS)include the:
A)minimum investment and maximum fees.
B)SEC guidelines for prudent investor actions.
C)objectives,constraints,and preferences.
D)asset allocation parameters and time horizons.
Q4) What are the differences between individual investors and institutional investors?
Q5) Based on empirical evidence,which of the following is the most important aspect in explaining portfolio performance?
A)Security selection
B)Market timing
C)Transactions costs
D)Asset allocation
Q6) How does the prudent investor rule affect asset allocation?
Page 23
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Chapter 22: Evaluation of Investment Performance
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Q1) Which of the following represents the alternative portfolio that reflects the objectives of the portfolio under management?
A)Market average index
B)Efficient portfolio
C)Benchmark portfolio
D)Performance standard
Q2) The purpose of performance attribution is to assess the risk of a portfolio.
A)True
B)False
Q3) GIPS requires compliant history for at least 10 years,or since inception,if less than 10 years.
A)True
B)False
Q4) GIPS requirements include: uniformity in certain performance calculations and disclosures;inclusion of all actual fee-paying discretionary portfolios in composites with similar objectives;compliant history for at least 5 years,or since inception if less than 5 years.
A)True
B)False
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