Financial Markets Module 1 Honors Quiz Answer week 1

Financial Markets
Module 1 Honors Quiz Answer

week 1

#Quiz

#Financial market

#Finance

#Yale University

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Module 1 Honors Quiz

Q1) Which of the following are new advancements and changes in finance?

Banking
Insurance
Information technology
Behavioral finance

Q2) What did Andrew Carnegie believe some people succeed in business and others don’t?

The business world selects for people who work hard
The business world selects for people with a good education
The business world selects for people with natural talent
The business world selects for people who get lucky opportunities

Q3) The main difference between Value at Risk and Stress Testing is:

Value at Risk is not a quantitative approach.
There are no differences between the two approaches.
Value at Risk takes a non-statistical approach, as opposed to Stress Testing.
Stress Testing takes a non-statistical approach with its scenarios analysis.

Q4) According to the Capital Asset Pricing Model (CAPM), a security with:

An alpha of zero is able to generate a return which is inferior to the market return.
An alpha of zero is able to generate a return which greater than the market return.
A positive alpha is considered overpriced, since the security outperforms the market.
A positive alpha is considered underpriced, since the security outperforms the market.

Q5) Which of the following are true about fat tail distributions?

They are a good model for some financial data
They are the best choice for most types of data
The mean is a good representation of the distribution
We must rely on the central limit theorem to gather useful information about them.

Q6) If an insurance company has 10000 policies, and each has 0.1 probability of making a claim, what is the standard deviation of the fraction of policies which result in a claim?

0.003

Q7) Why was the National Association of Insurance Commissioners created?

To suggest laws that would decentralize the insurance industry
To suggest laws that would strengthen the insurance industry
To suggest laws that would decrease the complexity of insurance regulation
To suggest laws that would prevent insurance corporations from becoming “too big to fail”

Q8) Insurance is managed by employers, so if an employee is sick and loses her job, her insurance will be expensive due to preexisting conditions; by contrast, a healthy person who loses his job may not be incentivized to purchase health insurance. This is an example of

Pooled risk
HMO
Moral hazard
Selection bias

Q9) In addition to earthquake, hurricane and terrorism, which of the following could be categorized as a “disaster” risk?

Bankruptcy Risk
Currency Risk
Market liquidity risk
A World War

Q10) One of the mentioned assumptions of portfolio management theory is that investors are rational. A rational investor:

Is always averse to risk.
Invests only in fully diversified portfolios.
Invests in passive funds rather than active funds.
Prefers a higher return for a given risk and prefers a lower risk for a given return

Q11) The market portfolio, which includes all traded assets available in the market, must have a beta which is:

Negative
Equal to 1
Above 1
Equal to 0

Q12) Among the risks associated with short selling a stock are: (check all that apply)

Default risk: potential unlimited losses when buying back the stock.
Regulatory risk: a ban on short sales can create a surge in the stock price.
Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified.
Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed.

Q13) Leveraging your portfolio: (check all that apply)

Increases your default risk by magnifying the standard deviation (risk) of your portfolio.
Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero.
Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified.
Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money.

Q14) You are an investor who wants to form a portfolio that lies to the right of the “optimal” minimum standard deviation portfolio on the efficient frontier. You must:

Invest only in risky securities.
Invest only in risk-free securities.
Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio.
Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities.

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