Risks & Diversification & Efficient Market Hypothesis Mcqs - Set 1

1)   Speculative bubbles may occur in the shares market ?

a. during periods of extreme pessimism because so many stocks become undervalued
b. only when people are irrational
c. when stocks are fairly valued
d. because rational people may buy an overvalued share if they think they can sell it to someone for even more at a later date
Answer  Explanation 

ANSWER: when stocks are fairly valued

Explanation:
No explanation is available for this question!


2)   Which of the following reduces risk in a portfolio the greatest ?

a. Increasing the number of shares from 10 to 20
b. All of these answers provide the same amount of risk reduction
c. Increasing the number of shares in the portfolio from 1 to 10
d. Increasing the number of shares from 20 to 30
Answer  Explanation 

ANSWER: Increasing the number of shares in the portfolio from 1 to 10

Explanation:
No explanation is available for this question!


3)   The study of a company’s accounting statements and future prospects to determine its value is known as ?

a. information analysis
b. risk management
c. fundamental analysis
d. diversification
Answer  Explanation 

ANSWER: fundamental analysis

Explanation:
No explanation is available for this question!


4)   Diversification of portfolio can ?

a. reduce aggregate risk
b. eliminate all risk
c. increase the standard deviation of the portfolio’s return
d. reduce idiosyncratic risk
Answer  Explanation 

ANSWER: reduce idiosyncratic risk

Explanation:
No explanation is available for this question!


5)   Which of the following is an example of moral hazard ?

a. After Gull buys fire insurance, he begins to smoke cigarettes in bed.
b. None of these answers demonstrate moral hazard
c. Mahmood has been feeling poorly lately so he seeks health insurance
d. All of these answers demonstrate moral hazard
Answer  Explanation 

ANSWER: After Gull buys fire insurance, he begins to smoke cigarettes in bed.

Explanation:
No explanation is available for this question!


6)   If people are risk averse, then ?

a. None of these answers are true
b. All of these answers are true
c. They dislike bad things more than the like comparable good things
d. The utility they would lose from losing a Rs50 bet would exceed the utility they would gain from winning a Rs 50 bet
e. Their utility function exhibit the property of diminishing marginal utility of wealth
Answer  Explanation 

ANSWER: All of these answers are true

Explanation:
No explanation is available for this question!


7)   An increase in the prevailing interest rate ?

a. increases the present value of future returns from investment and increases investment
b. decreases the present value of future return from investment and decreases investment
c. decreases the present value of future returns from investment and increase investment
d. increases the present value of future returns from investment and decreases investment
Answer  Explanation 

ANSWER: decreases the present value of future return from investment and decreases investment

Explanation:
No explanation is available for this question!


8)   If a depositor puts Rs100 in a bank amount that earns 4 percent interest compounded annually, how much will be in the account after five years ?

a. Rs400.00
b. Rs 104.00
c. Rs 121.67
d. Rs 123.98
Answer  Explanation 

ANSWER: Rs 121.67

Explanation:
No explanation is available for this question!


9)   It is difficult for an actively managed investment fund to outperform an index fund because ?

a. stock markets tend to be inefficient
b. all of these answers
c. index funds are able to buy undervalued stocks
d. actively managed funds trade more often and charge fees for their alleged expertise
Answer  Explanation 

ANSWER: actively managed funds trade more often and charge fees for their alleged expertise

Explanation:
No explanation is available for this question!


10)   Share prices will follow a random walk if ?

a. shares are overvalued
b. people behave irrationally when choosing shares
c. markets reflect all available information in a rational way
d. shares are undervalued
Answer  Explanation 

ANSWER: markets reflect all available information in a rational way

Explanation:
No explanation is available for this question!


11)   Which of the following should cause the price of a share of stock to rise ?

a. None of these answers
b. An increase in expected dividends
c. A reduction in aggregate risk
d. A reduction in the interest rate
e. All of these answers
Answer  Explanation 

ANSWER: All of these answers

Explanation:
No explanation is available for this question!


12)   If the efficient markets hypothesis is true, then ?

a. shares tend to be overvalued
b. the stock market is informationally efficient so share prices should follow a random walk
c. All of these answers
d. fundamental analysis is a valuable tool for increasing one’s returns from investing in shares
Answer  Explanation 

ANSWER: the stock market is informationally efficient so share prices should follow a random walk

Explanation:
No explanation is available for this question!


13)   Compared to a portfolio composed entirely of shares a portfolio that is 50 percent government bonds and 50 percent shares will have a ?

a. lower return and a lower level or risk
b. lower return and a higher level of risk
c. higher return and a lower level or risk
d. higher return and a higher level of risk
Answer  Explanation 

ANSWER: lower return and a lower level or risk

Explanation:
No explanation is available for this question!


14)   Idiosyncratic risk is the ?

a. uncertainty associated with the entire economy
b. uncertainty associated with specific companies
c. risk associated with adverse selection
d. risk associated with moral hazard
Answer  Explanation 

ANSWER: uncertainty associated with specific companies

Explanation:
No explanation is available for this question!


15)   Which of the following does not help reduce the risk that people face ?

a. increasing the rate of return within their portfolio
b. diversifying their portfolio
c. All of these answers help reduce risk
d. buying insurance
Answer  Explanation 

ANSWER: increasing the rate of return within their portfolio

Explanation:
No explanation is available for this question!


16)   If two countries start with the same real GDP/person and one country grows at 2 percent while the other grows at 4 percent ?

a. one country will always have 2 percent more real GDP/person than the other
b. the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth
c. the standard of living in the two countries will converge
d. Next year the country growing at 4 percent will have twice the GDP/person as the country growing at 2 percent
Answer  Explanation 

ANSWER: the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth

Explanation:
No explanation is available for this question!


17)   JCB (Which makes agricultural and construction equipment) has the opportunity to purchase a new factory today that will provide them with a Rs50 million return four years from now If prevailing interest rates are 6 percent, what is the maximum that the project can cost for JCB to be willing to undertake the project ?

a. Rs 43,456,838
b. Rs 53,406,002
c. Rs 34,538,902
d. Rs 39,604,682
Answer  Explanation 

ANSWER: Rs 39,604,682

Explanation:
No explanation is available for this question!


18)   The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as ?

a. future value
b. fair value
c. present value
d. compound value
e. beginning value
Answer  Explanation 

ANSWER: present value

Explanation:
No explanation is available for this question!