ECON 2035 Chapter 4 & 5 Test
Questions with All Complete
Solutions.
How do economists define expected return and risk?
A.
Risk is the price of an asset a year from now, while expected return is the degree of uncertainty
in the return a year from now.
B.
Risk is the return expected on an asset during a future period, while expected return is the
degree of uncertainty in the return on an asset.
C.
Expected return is the return expected on an asset during a future period, while risk is the
degree of uncertainty in the return on an asset.
D.
Expected return is the price of an asset a year from now, while risk is the degree of uncertainty
in the return a year from now. - Answer Expected return is the return expected on an asset
during a future period, while risk is the degree of uncertainty in the return on an asset.
What is meant by the term "risk averse"?
A.
It refers to investors who prefer risk to safe investments, meaning that risk-averse investors
would choose gambling over any form of investment.
B.
It refers to investors who have an aversion to risk, meaning that when choosing between two
assets, risk-averse investors would ignore risk and only consider expected return.
C.
It refers to investors who have an aversion to risk, meaning that when choosing between two
assets with the same expected returns, risk-averse investors would choose the asset with the
lower risk.
D.
It refers to investors who prefer risk to safe investments, meaning that when choosing between
two assets, risk-averse investors would choose the asset with the possibility of maximizing
return.
Investors are typically risk averse, which leads to the observations that a trade-off exists
between risk and return. - Answer It refers to investors who have an aversion to risk,
meaning that when choosing between two assets with the same expected returns, risk-averse
investors would choose the asset with the lower risk.
,Market risk is the risk that is common to all assets of a certain type, while idiosyncratic risk is
the risk that pertains to a particular asset rather than to the market as a whole.
How does diversification reduce the risk of a financial portfolio?
A.
By allocating savings among many different assets, if one asset class performs poorly, the rest of
the portfolio may perform well.
B.
By determining if an asset produces market risk or idiosyncratic risk, an investor can then
determine how well the asset will perform.
C.
By allocating savings to only one asset class, if the asset performs well, the benefit from the
investment will be huge.
D.
By accurately calculating the expected return of an asset, investors will be guaranteed a strong
return. - Answer By allocating savings among many different assets, if one asset class
performs poorly, the rest of the portfolio may perform well.
[Related to the Apply the Concept: "Will a Black Swan Eat Your 401(k)?"] In early 2020, an article
on bloomberg.com discussed the effects of the Covid-19 pandemic on the world oil market.
Covid-19 first appeared in the Chinese city of Wuhan in late 2019 and led to significant
disruptions to the Chinese economy. The article quoted one financial analyst as saying that the
oil industry was "contending with a potential black swan situation."
What did the analyst mean by a "black swan situation"?
A.
It is a situation that harms only one country while all other countries continue to prosper.
B.
It is a situation that causes short-term losses but will create significant long-term profits.
C.
It is a situation that occurs at regular and predictable intervals which causes losses across the
world economy.
D.
It is a situation that only occurs rarely but that has a large impact on the econ - Answer It is a
situation that only occurs rarely but that has a large impact on the economy.
Many things can affect demand and supply in the oil market; one example is the increasing
popularity of electric cars. Why would the analyst distinguish the spread of the coronavirus as a
"black swan situation" rather than just one of many factors affecting the demand for oil?
A.
, Because factors like electric cars have the potential to increase profits for the oil industry while
the coronavirus only has negative implications.
B.
Because electric cars impact the demand for oil while the coronavirus impacts both the supply
and demand for oil.
C.
Because electric cars impact both the supply and demand for oil while the coronavirus impacts
only the demand for oil.
D.
Because competition and innovation are known and expected factors while the coronavirus was
an unlikely and unexpected situation. - Answer Because competition and innovation are
known and expected factors while the coronavirus was an unlikely and unexpected situation.
Why does the demand curve for bonds slope down? Why does the supply curve for bonds slope
up? - Answer As the price of bonds increases, the interest rates on the bonds will fall, thus
reducing the quantity of bonds demanded. Likewise, as the price of bonds increases, the
interest rates on the bonds will fall, thus holders of bonds will be more willing to sell them,
increasing the quantity supplied.
The higher the price of bonds, the greater the quantity of bonds demanded.
A.
False—The
price of bonds does not influence the quantity of bonds demanded.
B.
True—The
higher the price of bonds, the higher their future value and therefore the greater the quantity of
bonds demanded.
C.
False—The
higher the price of bonds, the lower the quantity of bonds demanded.
D.
True—The
higher the price of bonds, the higher the interest paid on the bonds is and therefore the greater
the quantity of bonds demanded. - Answer False—The
higher the price of bonds, the lower the quantity of bonds demanded.
The lower the price of bonds, the smaller the quantity of bonds supplied.
A.
Questions with All Complete
Solutions.
How do economists define expected return and risk?
A.
Risk is the price of an asset a year from now, while expected return is the degree of uncertainty
in the return a year from now.
B.
Risk is the return expected on an asset during a future period, while expected return is the
degree of uncertainty in the return on an asset.
C.
Expected return is the return expected on an asset during a future period, while risk is the
degree of uncertainty in the return on an asset.
D.
Expected return is the price of an asset a year from now, while risk is the degree of uncertainty
in the return a year from now. - Answer Expected return is the return expected on an asset
during a future period, while risk is the degree of uncertainty in the return on an asset.
What is meant by the term "risk averse"?
A.
It refers to investors who prefer risk to safe investments, meaning that risk-averse investors
would choose gambling over any form of investment.
B.
It refers to investors who have an aversion to risk, meaning that when choosing between two
assets, risk-averse investors would ignore risk and only consider expected return.
C.
It refers to investors who have an aversion to risk, meaning that when choosing between two
assets with the same expected returns, risk-averse investors would choose the asset with the
lower risk.
D.
It refers to investors who prefer risk to safe investments, meaning that when choosing between
two assets, risk-averse investors would choose the asset with the possibility of maximizing
return.
Investors are typically risk averse, which leads to the observations that a trade-off exists
between risk and return. - Answer It refers to investors who have an aversion to risk,
meaning that when choosing between two assets with the same expected returns, risk-averse
investors would choose the asset with the lower risk.
,Market risk is the risk that is common to all assets of a certain type, while idiosyncratic risk is
the risk that pertains to a particular asset rather than to the market as a whole.
How does diversification reduce the risk of a financial portfolio?
A.
By allocating savings among many different assets, if one asset class performs poorly, the rest of
the portfolio may perform well.
B.
By determining if an asset produces market risk or idiosyncratic risk, an investor can then
determine how well the asset will perform.
C.
By allocating savings to only one asset class, if the asset performs well, the benefit from the
investment will be huge.
D.
By accurately calculating the expected return of an asset, investors will be guaranteed a strong
return. - Answer By allocating savings among many different assets, if one asset class
performs poorly, the rest of the portfolio may perform well.
[Related to the Apply the Concept: "Will a Black Swan Eat Your 401(k)?"] In early 2020, an article
on bloomberg.com discussed the effects of the Covid-19 pandemic on the world oil market.
Covid-19 first appeared in the Chinese city of Wuhan in late 2019 and led to significant
disruptions to the Chinese economy. The article quoted one financial analyst as saying that the
oil industry was "contending with a potential black swan situation."
What did the analyst mean by a "black swan situation"?
A.
It is a situation that harms only one country while all other countries continue to prosper.
B.
It is a situation that causes short-term losses but will create significant long-term profits.
C.
It is a situation that occurs at regular and predictable intervals which causes losses across the
world economy.
D.
It is a situation that only occurs rarely but that has a large impact on the econ - Answer It is a
situation that only occurs rarely but that has a large impact on the economy.
Many things can affect demand and supply in the oil market; one example is the increasing
popularity of electric cars. Why would the analyst distinguish the spread of the coronavirus as a
"black swan situation" rather than just one of many factors affecting the demand for oil?
A.
, Because factors like electric cars have the potential to increase profits for the oil industry while
the coronavirus only has negative implications.
B.
Because electric cars impact the demand for oil while the coronavirus impacts both the supply
and demand for oil.
C.
Because electric cars impact both the supply and demand for oil while the coronavirus impacts
only the demand for oil.
D.
Because competition and innovation are known and expected factors while the coronavirus was
an unlikely and unexpected situation. - Answer Because competition and innovation are
known and expected factors while the coronavirus was an unlikely and unexpected situation.
Why does the demand curve for bonds slope down? Why does the supply curve for bonds slope
up? - Answer As the price of bonds increases, the interest rates on the bonds will fall, thus
reducing the quantity of bonds demanded. Likewise, as the price of bonds increases, the
interest rates on the bonds will fall, thus holders of bonds will be more willing to sell them,
increasing the quantity supplied.
The higher the price of bonds, the greater the quantity of bonds demanded.
A.
False—The
price of bonds does not influence the quantity of bonds demanded.
B.
True—The
higher the price of bonds, the higher their future value and therefore the greater the quantity of
bonds demanded.
C.
False—The
higher the price of bonds, the lower the quantity of bonds demanded.
D.
True—The
higher the price of bonds, the higher the interest paid on the bonds is and therefore the greater
the quantity of bonds demanded. - Answer False—The
higher the price of bonds, the lower the quantity of bonds demanded.
The lower the price of bonds, the smaller the quantity of bonds supplied.
A.
