Chapter 4 Risk 1A

What is a key characteristic of all investments?

• They are completely risk-free

• They come with some level of risk

• They guarantee high returns

• They are unaffected by inflation

Why is it problematic for investor resources to downplay risk?

• It ensures higher returns

• It creates a false understanding of investing

• It eliminates the need for a portfolio strategy

• It reduces the need for risk mitigation

What is the primary job of a good investor?

• To avoid all risks entirely

• To balance risk and reward effectively

• To maximize risk for higher returns

• To invest only in risk-free assets

What does the Risk/Reward Profile of an investment describe?

• The guaranteed return of an investment

• The unique combination of risk and potential reward

• The investor’s personal financial goals

• The amount of cash reserves needed

Which type of investment is considered closest to “risk-free”?

• Cryptocurrency

• U.S. Treasury bills

• Real estate flipping

• Stock market investments

What is the “risk premium” of an investment?

• The total return of the investment

• The difference between its return and a risk-free asset’s return

• The amount of principal invested

• The cost of mitigating its risks

Why might an investor reject a high-risk investment with a low risk premium?

• It offers too high a return

• The additional reward doesn’t justify the increased risk

• It is too similar to a risk-free asset

• It lacks diversification

What does a higher risk premium generally indicate?

• Lower risk and lower reward

• Higher potential reward for higher risk

• A guaranteed return

• No need for mitigation strategies

Which real estate strategy typically carries the highest risk?

• Long-term rentals

• Short-term rentals

• House flipping

• Cash reserves

What is a key reason investments with exceptional returns and low risk are rare?

• Markets are inefficient

• Markets are efficient

• Investors avoid them

• They are illegal