Financial Markets
Why might an investor not normally invest large sums of money into Walmart or Apple stock?
Their stock prices are highly volatile, and thus carry a lot of risk.
A 5% 3-month Value at Risk (VaR) of $1 million represents:
There is a 5% chance of the asset declining in value by $1 million during the 3-month time frame.
What happens in the United State if your insurance company goes bankrupt?
There is no protection from the government against insurance company failure.
Which of the following is NOT a learning objective in this course?
How to make money
Which of these best describes risk pooling?
If individual events are independent, risk can be decreased by averaging across all of the events.
Which of the following was NOT a factor which led to the proliferation of life insurance?
Increased life expectancy.
One of the main reasons why many homeowners did not have flood insurance before advent of Hurricane Katrina in 2005 was ______.
Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance.
What problem does the US Affordable Care Act attempt to address and how does it do so?
It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty.
Why is the normal distribution not a good model of some financial data?
It does not have many outliers.
Which of the following professions has the highest projected employment for 2024?
Financial Advisor
An efficient portfolio is a combination of assets which _______.
Achieves the highest return for a given risk.
Risk diversification can be better achieved by ______
By including in your portfolio all classes of assets traded in the market, independently of their risks. With mutual funds, or unit investment trust if you hold a small number of assets.
A stress test ______
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.
Spreading you're "eggs" around allows you to ______.
Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio.
Why is it relevant that finance tends to attract large amounts of money?
Money can be used for good or evil, Finance attracts people from around the globe, and Financial Markets are a critical component of economic success.
According to Andrew Carnegie, what should somebody do once she/he is wealthy?
Retire early and commit to philanthropy while young
In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured by _______
The Beta
Short selling, which is defined as the sale of a security that the seller has borrowed, is motivated by the belief that ______.
The price of the security will decline.
Market (or systematic) risk ______, whereas idiosyncratic risk ______.
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.
The expected return of a portfolio is computed as _______, and the standard deviation of a portfolio is ______.
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.