#1
Which of the following investments typically offers the highest potential return but also carries the highest risk?
Stocks
ExplanationStocks generally offer high potential returns but are subject to market volatility.
#2
What is systematic risk?
Risk that is inherent to the entire market.
ExplanationSystematic risk affects the overall market, not specific assets.
#3
Which of the following is an example of unsystematic risk?
Company-specific lawsuit
ExplanationUnsystematic risk is specific to individual assets or sectors.
#4
Which of the following is NOT a factor affecting investment risk?
Investor's age
ExplanationInvestor's age is not a direct determinant of investment risk.
#5
Which of the following is a measure of investment return?
Alpha
ExplanationAlpha represents the excess return of an investment over its expected return.
#6
Which of the following is true regarding the risk-return tradeoff?
Higher risk is always associated with higher returns.
ExplanationRisk and return are generally positively correlated, but not always.
#7
What is beta in finance?
A measure of the volatility of an asset compared to the market.
ExplanationBeta quantifies the asset's sensitivity to market movements.
#8
Which of the following is NOT a measure of investment risk?
Earnings per Share (EPS)
ExplanationEPS is a measure of profitability, not risk.
#9
What does a negative alpha value indicate in financial analysis?
The investment is underperforming the market.
ExplanationAlpha measures an investment's performance relative to a benchmark.
#10
Which of the following statements is true regarding diversification?
Diversification reduces unsystematic risk but not systematic risk.
ExplanationDiversification spreads risk across different assets, reducing specific risks.
#11
What is the primary assumption of the Efficient Market Hypothesis (EMH)?
Market prices reflect all available information.
ExplanationEMH posits that asset prices quickly reflect all available information.
#12
What is standard deviation in finance?
A measure of the dispersion of returns around the average return.
ExplanationStandard deviation assesses the variability of returns from the mean.
#13
What is the Capital Asset Pricing Model (CAPM) used for?
To estimate the cost of equity.
ExplanationCAPM calculates the expected return of an asset based on its risk.
#14
What is the formula for calculating the Sharpe Ratio?
(Annual return - Risk-free rate) / Standard deviation
ExplanationSharpe Ratio assesses risk-adjusted returns relative to volatility.
#15
What does the coefficient of variation measure in finance?
The risk per unit of return of an investment.
ExplanationCoefficient of variation standardizes risk relative to return.
#16
What is the purpose of Monte Carlo simulation in risk analysis?
To estimate the probability of various outcomes in a decision process.
ExplanationMonte Carlo simulation assesses outcomes based on probabilistic models.
#17
What does the Jensen's Alpha measure in finance?
The risk-adjusted return of an investment relative to a benchmark.
ExplanationJensen's Alpha assesses an investment's performance relative to its expected return.