Risk Management Exam Review
Course Introduction
Risk Management is a comprehensive course designed to introduce students to the principles and practices of identifying, assessing, and mitigating risks within various organizational contexts. The course covers key topics such as risk identification techniques, qualitative and quantitative risk analysis, risk response planning, and the implementation of risk control strategies. Through case studies, practical exercises, and theoretical discussions, students will explore the role of risk management in business continuity, financial stability, and strategic decision-making. By the end of the course, students will be equipped with the skills to develop effective risk management plans and contribute to the resilience and success of organizations in a dynamic and uncertain environment.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Sample Questions
Q1) Refer to Exhibit 1.3.What was your arithmetic mean annual yield for the investment in XMen Industries.
A) 0.1462
B) 0.1247
C) 1.8
D) 0.40
E) 0.25
Answer: A
Q2) Refer to Exhibit 1.6.Calculate the risk premium for the market portfolio.
A) 4.5%
B) 8.25%
C) 4.75%
D) 3.5%
E) None of the above
Answer: C
Q3) The two most common calculations investors use to measure return performance are arithmetic means and geometric means.
A)True
B)False
Answer: True
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?
A) Capital appreciation
B) Capital preservation
C) Return preservation
D) Current income
E) Total return
Answer: D
Q2) John is 55 years old has $55,000 outstanding on a mortgage and no other debt.John typically saves $5,000 in an IRA account and another $10,000 in a company pension.John is most likely in the:
A) Discovery phase
B) Accumulation phase
C) Consolidation phase
D) Spending phase
E) Gifting phase
Answer: C
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) Refer to Exhibit 3.1.What is the real return on large capitalization stocks?
A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%
Answer: D
Q2) The decrease in the standard deviation of returns after adding 40 to 50 securities within a country is known as domestic diversification.
A)True
B)False
Answer: True
Q3) Subordinated bondholders have claim to the assets of the firm only after the firm has satisfied the claims of all senior secured and debenture bondholders.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Securities Markets: Organization and Operation
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Sample Questions
Q1) Negotiation,competitive bids,and best efforts are three forms of underwriting arrangements.
A)True
B)False
Q2) The NYSE has dominated the other U.S.exchanges in trading volume.
A)True
B)False
Q3) When a market is internally efficient,it means that
A) The market has price continuity.
B) The market has minimal transactions costs
C) The market has good depth
D) The market has more buyers than sellers
E) The market has more sellers than buyers
Q4) In a negotiated bid,the underwriter carries out the following service(s)
A) Origination, risk-bearing, and distribution.
B) Origination and risk-bearing.
C) Risk-bearing and distribution.
D) Origination and distribution.
E) Risk-bearing and distribution .
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Chapter 5: Security-Market Indexes
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Sample Questions
Q1) The Dow Jones Industrial Average has been criticized for being blue-chip biased.
A)True
B)False
Q2) There are no composite series currently available that will measure the performance of all securities (i.e.stocks and bonds)in a given country.
A)True
B)False
Q3) Which of the following is <b>not</b> a U.S.investment-grade bond index?
A) Merrill Lynch
B) Ryan Treasury
C) Salomon Brothers
D) Lehman Brothers
E) None of the above (that is, all are U.S. investment-grade bond indexes)
Q4) Refer to Exhibit 5.6.Calculate a price weighted average for Day T.
A) 46.20
B) 53.33
C) 54.12
D) 92.39
E) 108.23
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Chapter 6: Efficient Capital Markets
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Sample Questions
Q1) If statistical tests of stock returns over time support the efficient market hypothesis the resulting correlations should be
A) Positive.
B) Negative.
C) Zero.
D) Lagged.
E) Skewed.
Q2) The implication of efficient capital markets and a lack of superior analysts have led to the introduction of
A) Balanced funds.
B) Naive funds.
C) January funds.
D) Index funds.
E) Futures options.
Q3) A portfolio manager without superior analytical skills should
A) Determine and quantify the risk preferences of a client.
B) Minimize transaction costs.
C) Maintain the specified risk level.
D) Ensure that the portfolio is completely diversified.
E) All of the above.
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Chapter 7: An Introduction to Portfolio Management
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Sample Questions
Q1) When individuals evaluate their portfolios they should evaluate
A) All the U.S. and non-U.S. stocks.
B) All marketable securities.
C) All marketable securities and other liquid assets.
D) All assets.
E) All assets and liabilities.
Q2) Semivariance,when applied to portfolio theory,is concerned with
A) The square root of deviations from the mean.
B) All deviations below the mean.
C) All deviations above the mean.
D) All deviations.
E) The summation of the squared deviations from the mean.
Q3) Risk is defined as the uncertainty of future outcomes.
A)True
B)False
Q4) An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.
A)True
B)False
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Chapter 8: An Introduction to Asset Pricing Models
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Sample Questions
Q1) A stock has a beta of 1.25.The risk free rate is 5% and the return on the market is 6%.The estimated return for the stock is 14%.According to the CAPM you should
A) Sell because it is overvalued.
B) Sell because it is undervalued.
C) Buy because it overvalued.
D) Buy because it is undervalued.
E) Short because it is undervalued.
Q2) The Capital Market Line (CML)refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.
A)True
B)False
Q3) Securities with returns that lie above the security market line are undervalued.
A)True
B)False
Q4) There can be only one zero-beta portfolio.
A)True
B)False
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Chapter 9: Multifactor Models of Risk and Return
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Q1) Arbitrage Pricing Theory (APT)specifies the exact number of risk factors and their identity
A)True
B)False
Q2) Refer to Exhibit 9.1.In the list above which are assumptions of the Arbitrage Pricing Model?
A) (1) and (4)
B) (1), (2), and (3)
C) (1), (3), and (5)
D) (2), (3), (4), and (6)
E) All six are assumptions
Q3) Refer to Exhibit 9.3.Suppose that you know that the prices of stocks A,B,and C will be $10.95,22.18,and $30.89,respectively.Based on this information
A) All three stocks are overvalued.
B) All three stocks are undervalued.
C) Stock a is undervalued, stock b is properly valued, stock c is undervalued.
D) Stock a is undervalued, stock b is properly valued, stock c is overvalued.
E) Stock a is overvalued, stock b is overvalued, stock c is undervalued.
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Chapter 10: Analysis of Financial Statements
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Sample Questions
Q1) In common size analysis all assets and liabilities on the balance sheet are divided by total sales.
A)True
B)False
Q2) Refer to Exhibit 10.4.Calculate the sustainable growth rate.
A) 27.8%
B)
C)
Q3) Refer to Exhibit 10.8.Calculate the return on equity (ROE)for Zeco Company and the Industry.
Zeco Industry Average
A) 1.52% 0.55%
B) 1.68% 5.40%
C) 2.10% 1.80%
D) 6.00% 5.40%
E) 8.40% 9.32%
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Chapter 11: Security Valuation Principles
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Sample Questions
Q1) Micro Corp.just paid dividends of $2 per share.Assume that over the next three years dividends will grow as follows,5% next year,15% in year two,and 25% in year 3.After that growth is expected to level off to a constant growth rate of 10% per year.The required rate of return is 15%.Calculate the intrinsic value using the multistage model.
A) $5.56
B) $66.4
C) $49.31
D) $43.66
E) none of the above
Q2) The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).
A)True
B)False
Q3) Refer to Exhibit 11.7.The future price of the stock in year 3 is
A) $81.75
B) $84.81
C) $92.56
D) $101.85
E) $111.16
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Page 13
Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Sample Questions
Q1) The U.S.balance of payments,the federal deficit and military contract awards are ____ of aggregate economic activity.
A) Leading indicators
B) Coincident indicators
C) Lagging indicators
D) Not categorized indicators
E) Not indicators
Q2) Which of the following is <b>not</b> a determinant of the aggregate gross profit margin?
A) Unit labor costs of production
B) Rate of inflation
C) Unemployment rate
D) Level of foreign competition
E) Growth rate of M2 money supply
Q3) An increase in the retention ratio will cause a decrease in the growth rate.
A)True
B)False
Q4) The best known monetary variable is the level of taxes.
A)True
B)False
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Chapter 13: Industry Analysis
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Sample Questions
Q1) While there is substantial dispersion in industry risk over periods of time,there is consistency in the industry risk during a period of time.
A)True
B)False
Q2) A number of factors affect the cash flow and risk prospects of different industries.Which of the following is <b>not </b>such a factor?
A) Demographics
B) Life-styles
C) Technology
D) Politics
E) None of the above (that is, all are factors to be considered)
Q3) The fact that all firms in an industry do not move together negates the value of industry analysis.
A)True
B)False
Q4) Input-output analysis would be useful to indicate the long run relationship between industries.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Sample Questions
Q1) What variables impact the Price/Sales ratio?
A) Sales growth rate, volatility of sales growth, profit margin
B) Earnings growth rate, volatility of sales growth, profit margin
C) Earnings growth rate, volatility of sales growth, operating margin
D) Sales growth rate, volatility of sales growth, operating margin
E) Sales growth rate, volatility of profit margin, profit margin
Q2) Refer to Exhibit 14.6.Calculate the adjusted operating profits before taxes.
A) $586.5
B) $225.64
C) $825.23
D) $831.56
E) $692.5
Q3) Given Birdchip's beta of 1.25 and a risk free rate of 6 percent,what is the expected rate of return assuming a 12 percent market return?
A) 1%
B) 10%
C) 11%
D) 12%
E) 31%
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Chapter 15: Equity Portfolio Management Stragtegies
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Sample Questions
Q1) Refer to Exhibit 15.1.The expected utilities of Portfolios A,B and C for Bob Bowman are
A) Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
B) Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
C) Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
D) Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
E) Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 4.73
Q2) Which of the following is <b>not</b> a technique for constructing a passive index portfolio?
A) Full replication
B) Sampling
C) Quadratic programming
D) Linear programming
E) None of the above (that is, all are techniques for constructing a passive index portfolio)
Q3) An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.
A)True
B)False
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Chapter 16: Technical Analysis
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Sample Questions
Q1) When the 50-day moving average crosses the 200-day moving average from below on good volume
A) This would be a bearish indicator because it signals a change to a negative trend.
B) This would be a bullish indicator because it signals a change to a negative trend.
C) This would be a bullish indicator because it signals a change to a positive trend.
D) This would be a bearish indicator because it signals a change to a positive trend.
E) None of the above.
Q2) Technical analysts feel that financial accounting statements lack information,or report it in a way that makes comparisons difficult.Which of the following does <b>not</b> constitute a problem?
A) Detailed information concerning sales and expenses by product line.
B) Statements of change in financial position.
C) Alternative ways of reporting expenses.
D) Alternative ways of reporting assets and liabilities.
E) The availability of psychological and nonquantitative variables.
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Chapter 17: Bond Fundamentals
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Sample Questions
Q1) A nonrefunding provision prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon refunding bond.
A)True
B)False
Q2) A major source of risk faced by GNMA issues is
A) Default risk.
B) Prepayment risk.
C) Counterparty risk.
D) a and b.
E) a, b and c.
Q3) Of the following provisions that might be found in a bond indenture,which would tend to reduce the coupon interest rate?
A) A call provision
B) No restrictive covenants
C) A sinking fund provision
D) Change in bond rating from Aaa to Aa
E) None of the above (that is, all will increase the coupon rate)
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) The price-yield curve is a concave curve representing the relationship of bond prices and yields.
A)True
B)False
Q2) What is the current price of a zero coupon bond with a 6% yield to maturity that matures in 15 years?
A) $4.17
B) $41.27
C) $417.27
D) $4,172.00
E) None of the above
Q3) Suppose the current 6 year rate is 9% and the current 5 year rate is 7%.What is the one year forward rate for five years?
A) 19.57%
B) 18.62%
C) 15.80%
D) 14.65%
E) 12.67%
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20
Chapter 19: Bond Portfolio Management Strategies
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Q1) Refer to Exhibit 19.7.Calculate the value of swap out of Bond A into Bond B.
A) 0.41%
B) 1.73%
C) 0.23%
D) 0.00%
E) 0.51%
Q2) In a barbell strategy
A) One half of funds are invested in short duration bonds and the test in long duration bonds.
B) Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds.
C) Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds.
D) An equal amount of funds are invested in a wide range of maturities.
E) None of the above.
Q3) A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.
A)True
B)False
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) A stock currently sells for $150 per share.A call option on the stock with an exercise price $155 currently sells for $2.50.The call option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
Q2) Assume that you purchased shares of a stock at a price of $35 per share.At this time you purchased a put option with a $35 strike price of $3.The stock currently trades at $40.Calculate the dollar return on this option strategy.
A) $3
B) -$2
C) $2
D) -$3
E) $0
Q3) A call option is in the money if the current market price is above the strike price.
A)True
B)False
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Chapter 21: Forward and Futures Contracts
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Q1) Refer to Exhibit 21.4.Suppose the yield curve changed so the that the new yield on the T-bond contract rose to 6.5% and the new yield on the T-note contract fell to 5.5%.Calculate the profit on the NOB futures spread.(Assume coupons are paid semiannually)
A) -$5850.92
B) -$6,671.42
C) $6,671.42
D) $5850.92
E) None of the above
Q2) A bond portfolio manager expects a cash inflow of $12,000,000.The manager plans to hedge potential risk with a Treasury futures contract with a value of $105,215.The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.85.The duration of bond portfolio is 8 years,and the duration of the CTD bond is 6.5 years.Indicate the number of contracts required and whether the position to be taken is short or long.
A) 114 contracts short
B) 114 contracts long
C) 119 contract short
D) 119 contracts long
E) None of the above
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Page 23
Chapter 22: Option Contracts
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Q1) Index options can only be settled in cash.
A)True
B)False
Q2) Refer to Exhibit 22.6.Calculate the price of the call option after the stock price has already moved down in value once (Cd).
A) $7.77
B) $14.35
C) $0
D) $4.21
E) $6.44
Q3) The entity that acts as the guarantor of each CBOE-traded contract is the A) Federal government
B) Securities and exchange commission
C) CBOE
D) Options clearing corporation
E) Federal reserve bank
Q4) Stock options expire on the Sunday following the third Saturday of the designated month.
A)True
B)False
Page 24
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.
A)True
B)False
Q2) Refer to Exhibit 23.9.What is the market value of the swap to the Skalmory Corporation?
A) -$9,000,000
B) -$1,804,000
C) -$87,654
D) $91,830
E) $7,620,000
Q3) Suppose the premium on a three year,four percent floor is equal to the premium on a three year,eight percent cap.This combination is referred to as
A) Zero-cost warrant
B) Zero-premium strap
C) Zero-cost collar
D) Zero-premium swap
E) Zero-cost FRA
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Assets, and Industry Ethics
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Q1) If the Micro mutual fund was originated by selling $250,000 of stock at $10.00 per share.Calculate its current NAV if the fund consists of the following four stocks. \[\begin{array} { c c c }
\text { Stack } & \text { Gheras } & \text { Price } \\
\hline Q & 9,500 & \$ 10.75 \\
R & 7,200 & \$ 13.90 \\ \text { S } & 4,50 [ & \$ 22.25 \\
T & 6,800 & \$ 14.75
\end{array}\]
A) $5.78
B) $10.00
C) $12.43
D) $16.11
E) $19.21
Q2) The market price of shares of a closed-end fund is typically determined by supply and demand.
A)True
B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) The Sharpe and Treynor measures complement each other and thus both should be used to measure portfolio performance.
A)True
B)False
Q2) Refer to Exhibit 25.11.Compute the Sharpe Measure for the A fund.
A) 0.012
B) 0.040
C) 0.069
D) 0.396
E) 1.142
Q3) Bailey,Richards,and Tierney maintain that any useful benchmark should have the following characteristics:
A) Measurable.
B) Investable.
C) Value-weighted.
D) a and b.
E) a, b and c.
Q4) Funds with low levels of diversification tend to "beat the market."
A)True
B)False
Page 27
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
Q2) Refer to Exhibit 1A.1.The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) Refer to Exhibit 1A.1.The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter 27: Investment and Retirement Plans
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Q1) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q2) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
E) Low investment risk.
Q3) ____ are investment specialists that are responsible for managing the investments of others.There are often legal standards against which they must abide in the performance of their duties.
A) Underwriters
B) Investments bankers
C) Fiduciaries
D) Account executives
E) Trust officers
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) What is the correlation coefficient for two assets with a covariance of .0032,if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q2) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q3) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Sample Questions
Q1) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
Q2) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Source URL: https://quizplus.com/quiz/24349
Sample Questions
Q1) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
Q2) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
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