Risk and Return (1)

Which of the following statements about risk is TRUE?

• Risk is about how uncertain your returns could be.
• Risk is about how much money you can lose.
• A risky asset is more likely to deliver higher return than a less risky asset.
• If an asset's risk increases, its price will also increase.

Suppose you can invest in 2 assets. Asset A will guarantee you 10% return, while asset B will give you either 5% or 15% with equal probability. You will choose asset A if you are…

• Risk-averse
• Risk-seeking
• Risk-neutral

Suppose you observe the probability distribution of an asset's return. The asset is risky if its probability distribution is…

• More spread out
• More compact around the expected return

From the probability distribution provided, the expected return of the asset is closest to:

• 9%

• 6.7%

• 10%

• 20%

From the probability distribution provided, the standard deviation of the asset is closest to:

• 10.4%

• 1.1%

• 22.0%

• 15.5%

Consider the following 4 assets. If you have to select only one, which one would you pick if you are risk-averse?

• D

• A

• B

• C

From the past returns provided, the expected return of the asset is closest to:

• 6.7%

• 9%

• 10%

• 20%

From the past returns provided, the standard deviation of the asset is closest to:

• 15.3%

• 12.5%

• 2.3%

• 10.4%

Geometric mean is always _______ arithmetic mean.

• lower than
• higher than
• the same as

From the statistics provided, it can be concluded that…

• Stocks that pay dividends deliver lower total returns than other stocks.

• Stocks always outperform bonds.

• Condominiums are more expensive than townhouses.

• Every investment delivers returns that beat inflation.