Module 1 Honors Quiz

Insurance is managed by employers, so if an employee is sick and loses her job, her insurance will be expensive due to preexisting conditions; by contracts, a healthy person who loses his job may not be incentivized to purchase health insurance. This is an example of:

Selection Bias

The main difference between Value at Risk and Stress Testing is:

stress testing takes a non-statistical approach with its scenario analysis

One of the mentioned assumptions of portfolio management theory is that investors are rational. A rational investor:

Prefers a higher return for a given risk and prefers a lower risk for a given return

According to the CAPM, a security with:

A positive alpha is considered under priced, since the security outperforms the market

If an insurance company has 10,000 policies, and each has 0.1 probability of making a claim, what is the standard deviation of the fraction of policies which result in a claim?

0.003. The standard deviation is √(p(1-p)/n), and √(0.1(1-0.1)/10000) = √(0.09/10000) = 0.3/100 = 0.003

In addition to earthquake, hurricane, and terrorism, which of the following could be categorized as a "disaster" risk?

A World War

Leveraging your portfolio

Allows you to increase your return on equity, magnifying positive or negative returns by borrowing money Increases your default risk by magnifying the standard deviation (risk) of your portfolio.

You are an investor who wants to form a portfolio that lies to the right of the "optimal" minimum standard deviation portfolio on the efficient frontier. You must:

Borrow money at the risk free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities.

Among the risks associated with short selling a stock are:

Default risk: potential unlimited losses when buying back the stock Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed Regulatory risk: a ban on short sales can create a surge in the stock price

The market portoflio, which includes all traded assets available in the market, must have a beta which is:

Equal to 1

Which of the following are new advancements and changes in finance?

Information Technology & Behavioral finance

What did Andrew Carnegie believe some people succeed in business and others don't?

The business world selects for people with natural talent

Which of the following are true about fat tail distributions?

They are a good model for some financial data

Why was the National Association of Insurance Commissioners created?

To suggest laws the would decrease the complexity of insurance regulation