Concept Of Risk And Return Quiz

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Concept Of Risk And Return Quiz - Quiz


Here is an interesting concept of risk and return quiz that is designed to test your knowledge of this subject. There are a lot of things that people assess before they decide to invest in a project and this signifies an element of risk of making less money than intended. People take risks at different levels and it is believed that high-risk projects bring more return. Do take up the quiz and get to see just how much you know about risk in projects and its relation to the rate of return.


Questions and Answers
  • 1. 

    The return may be thought of as _________________. 

    • A.

      The growth in the value of an investment.

    • B.

      The risk associated with an investment.

    • C.

      Obtained only if the company pays dividends; without dividends, return is 0.

    • D.

      The process of returning the stock to the corporation that issued it.

    Correct Answer
    A. The growth in the value of an investment.
    Explanation
    The return refers to the growth in the value of an investment. It represents the increase in the value of the investment over a certain period of time, taking into account factors such as capital appreciation and dividends received. It is a measure of the profitability or performance of an investment and is often expressed as a percentage. The return reflects how well the investment has performed and can be used to compare different investment options.

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  • 2. 

    Dividends _____ the rate of return?

    • A.

      Decrease

    • B.

      Increase

    • C.

      Have no effect on

    • D.

      Increase the risk of

    Correct Answer
    B. Increase
    Explanation
    Dividends increase the rate of return because they represent a portion of the company's profits that are distributed to shareholders. When a company pays dividends, it provides an additional source of income for investors, which in turn increases their overall return on investment. This is especially beneficial for income-focused investors who rely on regular dividend payments to generate income from their investments. Therefore, dividends have a positive impact on the rate of return.

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  • 3. 

    A holding period _____________________. 

    • A.

      Is always a year

    • B.

      Is always a month

    • C.

      Is always a quarter

    • D.

      Can be any length of time

    Correct Answer
    D. Can be any length of time
    Explanation
    The correct answer is that a holding period can be any length of time. This means that there is no set duration for how long an investment must be held before it can be sold or disposed of. It can vary depending on the specific investment strategy, financial goals, and market conditions. Some investors may hold their investments for a few days or weeks, while others may hold them for several years. The flexibility of the holding period allows investors to adapt to changing market conditions and make decisions based on their individual needs and circumstances.

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  • 4. 

    What does the standard deviation measure?

    • A.

      The gain on the investment.

    • B.

      The holding period

    • C.

      Risk

    • D.

      The amount of dividend.

    Correct Answer
    C. Risk
    Explanation
    Standard deviation measures the variability or dispersion of a set of values from its average. In the context of this question, it refers to the risk associated with an investment. A higher standard deviation indicates a greater level of risk, as it suggests that the returns of the investment are more spread out and less predictable. Conversely, a lower standard deviation implies lower risk, as the returns are more consistent and closer to the average. Therefore, the correct answer is "risk".

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  • 5. 

    Think carefully about this one. Some investors will accept high-risk investments and some investors prefer low-risk investments.  What term best describes that situation?

    • A.

      Risk aversion

    • B.

      Risk return tradeoff

    • C.

      Risk tolerance

    • D.

      Rate of return

    Correct Answer
    C. Risk tolerance
    Explanation
    The term "risk tolerance" best describes the situation where some investors accept high-risk investments and some prefer low-risk investments. Risk tolerance refers to an individual's willingness to take on risk in their investment portfolio. Some investors may have a high risk tolerance and are comfortable with the potential for higher returns, even if it means a higher chance of losing money. On the other hand, some investors may have a low risk tolerance and prefer safer, lower-risk investments to protect their capital.

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  • 6. 

    An example of a specific risk:

    • A.

      A CEO is fired

    • B.

      A recession

    • C.

      A war

    • D.

      A presidential election

    Correct Answer
    A. A CEO is fired
    Explanation
    Note that the other 3 answers cause market risk

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  • 7. 

    In the financial markets, what is the DOW used for?

    • A.

      It is a measure of specific risk

    • B.

      It is a measure of market risk

    • C.

      It measures stock price levels for the entire market

    • D.

      It measures the level of dividends paid by various companies

    Correct Answer
    C. It measures stock price levels for the entire market
    Explanation
    The DOW, also known as the Dow Jones Industrial Average, is a stock market index that measures the stock price levels for the entire market. It is composed of 30 large, publicly traded companies and is used as a benchmark to gauge the overall performance of the stock market. By tracking the price movements of these 30 companies, the DOW provides insights into the overall direction and health of the stock market, making it a useful tool for investors and analysts.

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  • 8. 

    The DOW sample of stocks is considered a valid representation of the market because _____________________. 

    • A.

      It is designed to include companies for major industries

    • B.

      It represents large amount (25%) of the value of all stocks traded

    • C.

      Both a and b

    • D.

      Neither a nor b

    Correct Answer
    C. Both a and b
    Explanation
    The DOW sample of stocks is considered a valid representation of the market because it is designed to include companies from major industries, ensuring a diverse representation. Additionally, it represents a large amount (25%) of the value of all stocks traded, further solidifying its validity as a market representation.

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  • 9. 

    How many stocks are included in the DOW?

    • A.

      20

    • B.

      30

    • C.

      100

    • D.

      500

    Correct Answer
    B. 30
    Explanation
    The DOW, also known as the Dow Jones Industrial Average, is a stock market index that measures the performance of 30 large publicly traded companies in the United States. These companies are leaders in their respective industries and are considered to be representative of the overall stock market. Therefore, the correct answer is 30, as there are 30 stocks included in the DOW.

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  • 10. 

    Which type of risk does diversification help to manage?

    • A.

      Specific

    • B.

      Market

    • C.

      Both a and b

    • D.

      Neither a nor b

    Correct Answer
    A. Specific
    Explanation
    Diversification helps to manage specific risks. By investing in a variety of different assets or securities, diversification spreads the risk across different investments, reducing the impact of any one investment performing poorly. This helps to mitigate specific risks associated with individual investments, such as the risk of a particular company or industry underperforming. Diversification does not directly manage market risks, which are influenced by broader economic factors that can affect the overall market.

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  • 11. 

    It is generally thought that an investor is fully diversified if she owns __ stocks.

    • A.

      1

    • B.

      5

    • C.

      20

    • D.

      30

    Correct Answer
    C. 20
    Explanation
    Owning 20 stocks is generally considered to provide sufficient diversification for an investor. Diversification is a risk management strategy that involves spreading investments across different assets to reduce the impact of any single investment's performance on the overall portfolio. By owning a diverse range of stocks, an investor can potentially reduce the risk of significant losses if one or a few investments underperform. Owning fewer than 20 stocks may not provide enough diversification, while owning more than 20 stocks may not significantly improve diversification benefits.

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  • 12. 

    What risk does the standard deviation measure?

    • A.

      Specific

    • B.

      Market

    • C.

      Total

    • D.

      It doesn't - it measures return, not risk

    Correct Answer
    C. Total
    Explanation
    The standard deviation measures the risk associated with an investment portfolio or a specific asset. In this case, the correct answer "Total" indicates that the standard deviation measures the overall risk of the investment, taking into account both market risk and specific risk. Market risk refers to the risk associated with the overall market conditions, while specific risk refers to the risk specific to an individual asset or investment. Therefore, the standard deviation provides a measure of the total risk involved in the investment.

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  • 13. 

    Investors profit from investments in stock by ______________. 

    • A.

      Receiving dividends

    • B.

      Price growth

    • C.

      Both a and b

    • D.

      Neither a nor b

    Correct Answer
    C. Both a and b
    Explanation
    Investors profit from investments in stock by both receiving dividends and experiencing price growth. Dividends are a portion of a company's profits that are distributed to shareholders, providing them with a regular income. Price growth refers to the increase in the value of the stock over time, allowing investors to sell their shares at a higher price than they initially purchased them for. Therefore, investors can benefit from both these factors, making option "both a and b" the correct answer.

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  • 14. 

    A rational investor will invest in a risky stock if ________________. 

    • A.

      They think they will earn a large return on the investment.

    • B.

      They have a high risk tolerance.

    • C.

      Both a and b

    • D.

      Neither a nor b

    Correct Answer
    C. Both a and b
    Explanation
    A rational investor will invest in a risky stock if they think they will earn a large return on the investment and if they have a high risk tolerance. This means that they believe the potential gains outweigh the potential risks associated with the investment, and they are willing to take on those risks due to their risk tolerance. Therefore, both factors - the expectation of a large return and a high risk tolerance - are necessary for a rational investor to invest in a risky stock.

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  • 15. 

    Compared to the DOW, the S&P 500 is ________________________. 

    • A.

      Is generally thought to represent a more valid sample

    • B.

      Includes small stocks

    • C.

      Includes less stocks than the DOW

    • D.

      Includes only foreign company stocks

    Correct Answer
    A. Is generally thought to represent a more valid sample
    Explanation
    The S&P 500 is generally thought to represent a more valid sample compared to the DOW. This is because the S&P 500 is a broader index that includes 500 large-cap stocks from various sectors, providing a more comprehensive representation of the overall stock market. On the other hand, the DOW only includes 30 large-cap stocks, which may not accurately reflect the performance of the entire market. Therefore, the S&P 500 is considered to be a more reliable benchmark for measuring the performance of the stock market.

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  • 16. 

    Which stock would an investor with a high risk tolerance prefer?

    • A.

      Stock A has a mean return of 7% and a standard deviation of 2%.

    • B.

      Stock B has a mean return of 7% and a standard deviation of 10%.

    • C.

      Stock C has a mean return of 12% and a standard deviation of 10%.

    • D.

      Stock D has a mean return of 12% and a standard deviation of 20%.

    Correct Answer
    C. Stock C has a mean return of 12% and a standard deviation of 10%.
    Explanation
    An investor with a high risk tolerance would prefer Stock C because it has the highest mean return of 12% among all the options. Although Stock D also has a mean return of 12%, its standard deviation of 20% indicates higher volatility and therefore higher risk. Stock C, on the other hand, has a lower standard deviation of 10%, making it a more favorable choice for an investor with a high risk tolerance who is seeking higher returns. Stock A and Stock B have lower mean returns and/or higher standard deviations, making them less attractive options for an investor with a high risk tolerance.

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  • 17. 

    The mean of 50 monthly returns return for a stock is 13%.  The standard deviation is 5%.  We can, therefore, be 68% certain that the return for any particular month is at least 

    • A.

      13%

    • B.

      5%

    • C.

      18%

    • D.

      8%

    Correct Answer
    D. 8%
    Explanation
    The standard deviation measures the dispersion or variability of the data. In a normal distribution, approximately 68% of the data falls within one standard deviation of the mean. Since the mean return is 13% and the standard deviation is 5%, we can be 68% certain that the return for any particular month is within 8% (13% - 5%) and 18% (13% + 5%). Therefore, the correct answer is 8%.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 02, 2016
    Quiz Created by
    Theprof
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