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10-1ChapterTenPrinciplesofRiskManagementThischaptercontains30multiplechoicequestions,10shortproblems,and5longerproblems.MultipleChoice1.________that“matters”becauseifaffectspeople'swelfare.________existswheneveronedoesnotknowforsurewhatwilloccurinthefuture.(a)Uncertaintyisrisk;Uncertainty(b)Riskisuncertainty;Uncertainty(c)Riskisuncertainty;Risk(d)Uncertaintyisrisk;RiskAnswer:(b)2.________isameasureofwillingnesstopaytoreduceone'sexposuretorisk.(a)Riskaversion(b)Riskavariciousness(c)Riskpredilection(d)RiskinflationAnswer:(a)3.Whenchoosingamonginvestmentalternativeswiththesameexpectedrateofreturn,ariskaverseindividualchoosestheonewiththe________risk.(a)surest(b)mostuncertain(c)lowest(d)highestAnswer:(c)10-24.________isaparticulartypeofriskpeoplefacebecauseofthenatureoftheirbusinessorpatternofconsumption.(a)Operationalefficiencyexposure(b)Opportunityexposure(c)Riskexposure(d)RiskreductionAnswer:(c)5.________areinvestorswhotakepositionsthatincreasetheirexposuretocertainrisksinthehopeofincreasingtheirwealth.(a)Operationsinsurers(b)Foreignexporters(c)Hedgers(d)SpeculatorsAnswer:(d)6.Theriskinessofanassetoratransaction________beassessedinisolationorintheabstract.(a)can(b)cannot(c)must(d)itvariesaccordingtothesituationAnswer:(b)7.Bydefinition,________areinvestorswhotakepositionstoreducetheirexposures.(a)operationsinsurers(b)foreignexporters(c)hedgers(d)speculatorsAnswer:(c)10-38.Theriskoflossarisingfromobsolescenceduetotechnologicalchangeorchangesinconsumertasteisanexampleof________.(a)unemploymentrisk(b)liabilityrisk(c)financial-assetrisk(d)dconsumer-durableassetriskAnswer:(d)9.Theriskarisingfromholdingdifferentkindsoffinancialassetssuchasequitiesorfixedincomesecuritiesdenominatedinoneormorecurrenciesisanexampleof________.(a)unemploymentrisk(b)liabilityrisk(c)financial-assetrisk(d)consumer-durableassetriskAnswer:(c)10.Businessrisksofthefirmarebornebyits________.(a)shareholders(b)creditors(c)employees(d)alloftheaboveAnswer:(d)11.________consistsoffiguringoutwhatthemostimportantriskexposuresarefortheunitofanalysis.(a)Riskassessment(b)Selectionofriskmanagementtechniques(c)Implementation(d)RiskidentificationAnswer:(d)10-412.Whichofthefollowingismostlikelytoneedalotoflifeinsurance?(a)asinglepersonwithnodependents(b)adivorcedpersonwithnodependents(c)adouble-incomecouplewithnokids(d)marriedpersonwithchildrenAnswer:(d)13.________isthequantificationofthecostsassociatedwiththerisksthathavebeenidentifiedinthefirststepofriskmanagement.(a)Riskassessment(b)Selectionofriskmanagementtechniques(c)Implementation(d)ReviewAnswer:(a)14.Sellingariskyassettosomeoneelseandbuyinginsuranceareexamplesof________.(a)riskavoidance(b)losspreventionandcontrol(c)risktransfer(d)riskretentionAnswer:(c)15.Oneissaidto________ariskwhentheactiontakentoreduceone’sexposuretoalossalsocausesonetogiveupthepossibilityofagain.(a)insure(b)diversify(c)hedge(d)payapremiumwithAnswer:(c)10-516.Whenyou________youpayapremiumtoeliminatetheriskoflossandretainthepotentialforgain.(a)insure(b)diversify(c)hedge(d)speculateAnswer:(a)17.Inorderfordiversificationtoreduceyourriskexposure,therisksmustbe________(a)lessthanperfectlycorrelatedwitheachother(b)morethanperfectlycorrelatedwitheachother(c)uncorrelated(d)noneoftheaboveAnswer:(a)18.Thedemandforwaystomanageriskhasbeenincreasedby________.(a)increasedvolatilityofexchangerates(b)increasedvolatilityofinterestrates(c)increasedvolatilityofcommodityprices(d)alloftheaboveAnswer:(d)19.Moralhazardandadverseselectionareexamplesof________.(a)transactionscosts(b)incentiveproblems(c)transferencecosts(d)bothaandbAnswer:(b)10-620.________isdefinedasquantitativeanalysisforoptimalriskmanagement.(a)Portfoliotheory(b)Corporatetheory(c)Diversificationtheory(d)ProbabilitytheoryAnswer:(a)21.Anassetportfolio'sexpectedreturnisidentifiedwiththe________ofthedistribution,anditsriskwiththe________.(a)variance;average(b)mean;standarddeviation(c)standarddeviation;average(d)median;normaldistributionAnswer:(b)22.SupposeyoubuysharesofRayFranstockatapriceof$110pershareandintendtoholdthemforayear.SupposeRayFranpaysadividendof$3.50pershareoverthatyear.ComputethetotalrateofreturnonashareofRayFranstockifattheendoftheyearyousellitfor$122.50pershare.(a)10.20%(b)11.36%(c)13.06%(d)14.55%Answer:(d)23.The________astock'svolatility,the________therangeofpossibleoutcomesandthe________theprobabilitiesofthosereturnsattheextremesoftherange.(a)larger;narrower;larger(b)larger;narrower;smaller(c)larger;wider;larger(d)larger;wider;smallerAnswer:(c)10-724.ConsidertheprobabilitydistributionofrateofreturnonRayFranstock:RateofReturnProbability40%0.2515%0.55–8%0.20ComputetheexpectedrateofreturnonRayFranstock.(a)9.75%(b)15.60%(c)16.65%(d)19.85%Answer:(c)25.Refertoquestion24.NowcomputethestandarddeviationofRayFranstock.(a)12.95%(b)13.10%(c)16.10%(d)25.90%Answer:(c)26.Considerastockwithanexpectedreturnof15%andastandarddeviationof8%thatisnormallydistributed.Whatisthe0.95confidenceintervalforthisstock'srateofreturn?(a)(7%,23%)(b)(–9%,39%)(c)(–1%,39%)(d)(–1%,31%)Answer:(d)10-8Forquestio