Chapter 10 - Risk and return

Which of the following is NOT an axiom of investor behaviour when making decisions?
1. Investors are able to rank alternatives
2. If A is preferred to B and B is preferred to C then A must be preferred to C
3. Investors can choose between alternatives that have the same degree of risk
4. Investors are able to specify a certainty equivalent value for any risky investment
Which of the following statements is likely to be true?
1. Most individuals are risk averse
2. The fact that so many people do the Lottery suggests that most individuals are risk seekers
3. Most individuals are neutral to risk
4. The fact that some people do the Lottery and pay for insurance means they are illogical
A certainty equivalent is:
1. The guaranteed outcome an investor would be prepared to swap for the risky outcome of an investment
2. The amount an investor is prepared to pay to avoid risk
3. A fixed rate government security
4. Two investments with the same expected outcomes
If an investor is risk averse, the certainty equivalent of the expected return on an investment will be:
1. Higher than the expected return of the investment
2. Lower than the expected return of the investment
3. The same as the expected return of the investment
An investor has a log normal utility function and has the chance to invest in an investment with the following likely outcomes:

Return Probability
200 .2
600 .6
800 .2

The individual's utility for the investment in utils would be:
1. 6.235
2. 529
3. 560
4. 960
The following information applies to the next two questions:

Ra Prob Rb Prob
20% .25 20% .3
10% .5 10% .4
0% .25 .0% .3

The expected return for a is:
1. Higher than b
2. Lower than b
3. The same as b
a is:
1. more risky than b
2. less risky than b
3. the same risk as b
The higher the standard deviation of the expected return on an investment is, the greater is:
1. The actual return on investment
2. The risk of the investment
3. The likelihood of making a loss
4. The likelihood of making a surplus
An investor has a choice between two investments A and B. A has a higher standard deviation than B. If the investor is logical she will:
1. Invest in A
2. Invest in B
3. Possibly choose A or B
Downside risk is generally:
1. Ignored by managers making decisions
2. Important to managers making decisions
3. Only important for private investors
4. Not important for private investors

Return	Probability
200	.2
600	.6
800	.2

Ra	Prob	Rb	Prob
20%	.25	20%	.3
10%	.5	10%	.4
0%	.25	.0%	.3

Chapter 10 - Risk and return

Quiz