Quiz

Which of the following was NOT a factor which led to the proliferation of life insurance? A.) Insurance salespeople B.) Increased life expectancy C.) Statistical data on life expectancy D.) New sales pitches

B.) Increased life expectancy

The main difference between Value at Risk and Stress Testing is: A.) Value at Risk takes a non-statistical approach, as opposed to Stress Testing. B.) Stress Testing takes a non-statistical approach with its scenarios analysis. C.) Value at Risk is not a quantitative approach. D.) There are no differences between the two approaches.

B.) Stress Testing takes a non-statistical approach with its scenarios analysis.

Risk diversification can be better achieved: (check all that apply) A.) With mutual funds or unit investment trusts if you hold a small number of assets. B.) With only stocks in your portfolio. C.) With only low risk assets in your portfolio. D.) By including in your portfolio all classes of assets traded in the market, independently of their risks.

A.) With mutual funds or unit investment trusts if you hold a small number of assets. D.) By including in your portfolio all classes of assets traded in the market, independently of their risks.

Which of the following are new advancements and changes in finance? A.) Behavioral finance B.) Insurance C.) Banking D.) Information technology

A.) Behavioral finance D.) Information technology

What did Andrew Carnegie believe some people succeed in business and others don't? A.) The business world selects for people with natural talent B.) The business world selects for people who work hard C.) The business world selects for people with a good education D.) The business world selects for people who get lucky opportunities

A.) The business world selects for people with natural talent

In addition to earthquake, hurricane and terrorism, which of the following could be categorized as a "disaster" risk? A.) Market liquidity risk B.) A World War C.) Bankruptcy Risk D.) Currency Risk

B.) A World War

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: A.) Invest only in risky securities. B.) Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities. C.) Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio. D.) Invest only in risk-free securities.

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

One of the mentioned assumptions of portfolio management theory is that investors are rational. A rational investor: A.) Prefers a higher return for a given risk and prefers a lower risk for a given return B.) Invests only in fully diversified portfolios. C.) Is always averse to risk. D.) Invests in passive funds rather than active funds.

A.) Prefers a higher return for a given risk and prefers a lower risk for a given return

An efficient portfolio is a combination of assets which: A.) Minimizes risk by ensuring only diversifiable risk remains. B.) Achieves the highest return for a given risk. C.) Offers a risk free rate of return by minimizing the risk of the portfolio. D.) Achieves the highest possible covariance among its assets.

B.) Achieves the highest return for a given risk.

The market portfolio, which includes all traded assets available in the market, must have a beta which is: A.) Negative B.) Equal to 0 C.) Equal to 1 D.) Above 1

C.) Equal to 1

If an insurance company has 10000 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

Leveraging your portfolio: (check all that apply) A.) Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money. B.) Increases your default risk by magnifying the standard deviation (risk) of your portfolio. C.) Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero. D.) Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified.

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

Among the risks associated with short selling a stock are: (check all that apply) A.) Default risk: potential unlimited losses when buying back the stock. B.) Regulatory risk: a ban on short sales can create a surge in the stock price. C.) Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed. D.) Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified.

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

What problem does the US Affordable Care Act ("Obamacare") attempt to address and how does it do so? A.) It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty. B.) It addresses selection bias by creating a healthcare system which is fully publicly-funded. C.) It addresses moral hazard by allowing hospitals to refuse treatment to those who cannot pay for it. D.) It addresses moral hazard by forcing hospitals to provide emergency services to those who cannot pay for it.

A.) It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty.

Which of the following are true about fat tail distributions? A.) They are a good model for some financial data B.) The mean is a good representation of the distribution C.) They are the best choice for most types of data D.) We must rely on the central limit theorem to gather useful information about them.

A.) They are a good model for some financial data

A stress test: A.) Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc. B.) Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises. C.) Tries to incorporate all the interconnections between financial institutions D.) Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises.

A.) Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc. B.) Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises. C.) Tries to incorporate all the interconnections between financial institutions

What happens in the United States if your insurance company goes bankrupt? A.) There is no protection from the government against insurance company failure B.) Consumers are insured from insurance company failure at the state level C.) Insurance companies are partially owned by the government, and thus are not allowed to fail. D.) Just like the FDIC protects consumers from bank failures, the federal government insures against insurance company failures

B.) Consumers are insured from insurance company failure at the state level

One of the main reasons why many homeowners did not have flood insurance before the advent of Hurricane Katrina in 2005 was: A.) Homeowners thought that the likelihood of a flood was too low to justify buying a flood insurance. B.) Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance. C.) Many homeowners were not aware that flood insurance existed in the first place. D.) Many homeowners were relying on the government instead.

B.) Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance.

Under the "Don't put all your eggs in one basket" analogy, the eggs represent individual investments and the basket represents the overall investment portfolio. Spreading your "eggs" around allows you to: A.) Maximize the return of your overall portfolio. B.) Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio. C.) Increase the uncertainty of your overall portfolio so you can try to generate an extra return. D.) Maximize the possibility that good luck for a single investment positively affects your overall portfolio.

B.) Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio.

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 contrast, a healthy person who loses his job may not be incentivized to purchase health insurance. This is an example of A.) Moral hazard B.) Selection bias C.) Pooled risk D.) HMO

B.) Selection bias

Short selling, which is defined as the sale of a security that the seller has borrowed, is motivated by the belief that: A.) The price of the security will rise. B.) The price of the security will decline. C.) The price of the security will stay the same. D.) Short selling is never prompted by speculation.

B.) The price of the security will decline.

A 5% 3-month Value At Risk (VaR) of $1 million represents: A.) The likelihood of a 5% of $1 million decline in the asset over the next 3-month. B.) A 5% decline in the value of the asset after 3 month, per each $1 million of notional. C.) A 5% chance of the asset declining in value by $1 million during the 3-month time frame. D.) A 5% chance of the asset increasing in value by $1 million during the 3-month time frame.

C.) A 5% chance of the asset declining in value by $1 million during the 3-month time frame.

Which of these best describes risk pooling? A.) If individual events are not independent, risk can be decreased by averaging across all of the events B.) Insurance companies must avoid situations whereby customers are incentivized to intentionally cause an incident (e.g. burning their house down) C.) If individual events are independent, risk can be decreased by averaging across all of the events D.) Sick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensive

C.) If individual events are independent, risk can be decreased by averaging across all of the events

According to the Capital Asset Pricing Model (CAPM), a security with: A.) An alpha of zero is able to generate a return which greater than the market return. B.) A positive alpha is considered overpriced, since the security outperforms the market. C.) An alpha of zero is able to generate a return which is inferior to the market return. D.) A positive alpha is considered underpriced, since the security outperforms the market.

D.) A positive alpha is considered underpriced, since the security outperforms the market.

Market (or systematic) risk ___________ whereas idiosyncratic risk __________. A.) Is the risk for an asset to not be able to be traded in the market at a later time Is the risk for an asset to experience losses due to factors that affect the entire stock market B.) Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to the industry of the asset and therefore not the market as a whole C.) Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to a specific asset and therefore not the market as a whole D.) Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset Is the risk which is endemic to a specific asset and therefore not the market as a whole

C.) Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to a specific asset and therefore not the market as a whole

Why is the normal distribution not a good model of some financial data? A.) The standard deviation is too high B.) Extreme events occur in it too often C.) It does not have many outliers D.) The standard deviation is too low

C.) It does not have many outliers

In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured by: A.) The standard deviation of returns. B.) The variance of returns. C.) The Beta. D.) The Alpha.

C.) The Beta.

Why might an investor not normally invest large sums of money into Walmart or Apple stock? A.) Both companies have received extensive media coverage B.) Their stock prices closely track the S&P500 C.) Their stock prices are highly volatile, and thus carry a lot of risk D.) The stock prices are very stable, making it difficult to gain large sums of money

C.) Their stock prices are highly volatile, and thus carry a lot of risk

Why was the National Association of Insurance Commissioners created? A.) To suggest laws that would prevent insurance corporations from becoming "too big to fail" B.) To suggest laws that would decentralize the insurance industry C.) To suggest laws that would decrease the complexity of insurance regulation D.) To suggest laws that would strengthen the insurance industry

C.) To suggest laws that would decrease the complexity of insurance regulation

The expected return of a portfolio is computed as ___________ and the standard deviation of a portfolio is ___________. A.) the simple average of the expected returns of each asset in the portfolio NOT the weighted average of the standard deviations of each individual asset B.) the simple average of the expected returns of each asset in the portfolio the weighted average of the standard deviations of each individual asset C.) the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset NOT the weighted average of the standard deviations of each individual asset D.) the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset the weighted average of the standard deviations of each individual asset

C.) the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset NOT the weighted average of the standard deviations of each individual asset