CM Group 5

What does the risk-return tradeoff state?

• Lower risk leads to higher returns

• Higher risk leads to lower returns

• Higher risk leads to higher potential returns

• There is no relationship between risk and return

What is the main principle behind the risk-return tradeoff?

• Investors prefer lower risk investments

• Higher risk is associated with higher potential returns

• Risk and return are unrelated

• Lower risk means higher returns

According to the risk-return tradeoff, what must an investor accept to potentially earn higher profits?

• Lower risk

• High certainty of returns

• Higher risk

• Fixed returns

Which of the following is NOT a factor that investors consider when evaluating risk-return tradeoff?

• Risk tolerance

• Potential to replace lost funds

• Past performance of the market

• Market conditions

What does the Alpha ratio measure?

• An investment's performance relative to a benchmark

• An investment's volatility relative to the market

• The risk-adjusted return of an investment

• The likelihood of loss

If the alpha is negative, what does it imply?

• The investment outperformed the benchmark

• The investment is in line with the benchmark

• The investment underperformed the benchmark

• The investment carried no risk

What does a Beta ratio greater than 1 indicate?

• The investment is less volatile than the market

• The investment is equally volatile as the market

• The investment is more volatile than the market

• The investment has no volatility

What does a Sharpe ratio evaluate?

• Market performance

• Risk-adjusted return

• Systematic risk

• Diversification of a portfolio

What does a higher Sharpe ratio suggest?

• Higher risk with lower compensation

• Poor risk-adjusted returns

• The investment compensates well for the risk taken

• Returns that are not justified by the risk

What is systematic risk?

• Risk that affects only a specific stock

• Risk unique to one industry

• Risk that affects the entire market

• Risk that can be diversified