Understanding Risk Quiz

Which of the following would not be included in a definition of risk?

• Risk is a measure of uncertainty.

• Risk can always be avoided at no cost.

• Risk has a time horizon.

• Risk usually involves some future payoff.

All other factors held constant, an investment:

• with more risk should offer a lower return and sell for a higher price.

• with less risk should sell for a lower price and offer a higher expected return.

• with more risk should sell for a lower price and offer a higher expected return.

• with less risk should sell for a lower price and offer a lower return.

Uncertainties that are not quantifiable:

• are what we define as risk.

• are factored into the price of an asset.

• cannot be priced.

• are benchmarks against which quantifiable risks can be assessed.

When measuring the risk of an asset:

• one must measure the uncertainty about the size of future payoffs.

• it is necessary to incorporate uncertainties that are not quantifiable.

• one must remember that the concept of risk applies only to financial markets, not to financial intermediaries.

• one cannot use other investments to evaluate the asset's risk.

Which of the following is true?

• Investments with higher risk generally have a higher expected return than risk-free investments.

• Investments that pay a return over a longer time horizon generally have less risk.

• Investments with a greater variance in the size of the future payoff generally pay a lower expected return.

• Risk-free investments are the best benchmark for measuring the risk of all investment strategies.

Inflation presents risk because:

• inflation is always present.

• inflation cannot be measured.

• there are different ways to measure it.

• there is no certainty regarding what inflation will be in the future.

If the probability of an outcome equals one, the outcome:

• is more likely to occur than the others listed.

• is certain to occur.

• is certain not to occur.

• has unquantifiable risk.

If a fair coin is tossed, the probability of coming up with either a head or a tail is:

• ½ or 50 percent.

• Zero.

• 1 or 100 percent.

• Unquantifiable.

If the probability of an outcome is zero, you know the outcome is:

• more likely to occur.

• certain to occur.

• less likely to occur.

• certain not to occur.

the outcome is:

• more likely to occur.

• certain to occur.

• less likely to occur.

• certain not to occur.