Financial Markets Lesson 2 Quiz Answer

Financial Markets Lesson 1 Quiz Answer

Week-1

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Lesson #2 Quiz

Q1) A stress test: (check all that apply)

• Tries to incorporate all the interconnections between financial institutions.

• Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises.

• Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc.

• Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises.

Q2) A 5% 3-month Value At Risk (VaR) of $1 million represents:

• A 5% chance of the asset declining in value by $1 million during the 3-month time frame.

• A 5% decline in the value of the asset after 3 month, per each $1 million of notional.

• A 5% chance of the asset increasing in value by $1 million during the 3-month time frame.

• The likelihood of a 5% of $1 million decline in the asset over the next 3-month.

Q3) In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured by:

• The standard deviation of returns

• The variance of returns

• The Beta

• The Alpha

Q4) Market (or systematic) risk ___________ whereas idiosyncratic risk

__________.

• Is the risk for an asset to not be able to be traded in the market at a later time

• Is the risk which is endemic to the industry of the asset and therefore not the market as a whole

• Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset

• Is the risk which is endemic to a specific asset and therefore not the market as a whole

Q5) Why might an investor not normally invest large sums of money into Walmart or Apple stock?

• Their stock prices are highly volatile, and thus carry a lot of risk

• Both companies have received extensive media coverage

• The stock prices are very stable, making it difficult to gain large sums of money

• Their stock prices closely track the S&P500

Q6) Why is the normal distribution not a good model of some financial data?

• It does not have many outliers

• The standard deviation is too low

• Extreme events occur in it too often

• The standard deviation is too high

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