Risks And Diversification & Efficient Market Hypothesis MCQs

Option A: during periods of extreme pessimism because so many stocks become undervalued

Option B: only when people are irrational

Option C: when stocks are fairly valued

Option 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

Correct Answer: when stocks are fairly valued ✔

Option A: Increasing the number of shares from 10 to 20

Option B: All of these answers provide the same amount of risk reduction

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

Option D: Increasing the number of shares from 20 to 30

Correct Answer: Increasing the number of shares in the portfolio from 1 to 10 ✔

Option A: information analysis

Option B: risk management

Option C: fundamental analysis

Option D: diversification

Correct Answer: fundamental analysis ✔

Option A: reduce aggregate risk

Option B: eliminate all risk

Option C: increase the standard deviation of the portfolio’s return

Option D: reduce idiosyncratic risk

Correct Answer: reduce idiosyncratic risk ✔

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

Option B: None of these answers demonstrate moral hazard

Option C: Mahmood has been feeling poorly lately so he seeks health insurance

Option D: All of these answers demonstrate moral hazard

Correct Answer: After Gull buys fire insurance, he begins to smoke cigarettes in bed. ✔

Option A: None of these answers are true

Option B: All of these answers are true

Option C: They dislike bad things more than the like comparable good things

Option D: The utility they would lose from losing a Rs50 bet would exceed the utility they would gain from winning a Rs 50 bet

Correct Answer: All of these answers are true ✔

Option A: increases the present value of future returns from investment and increases investment

Option B: decreases the present value of future return from investment and decreases investment

Option C: decreases the present value of future returns from investment and increase investment

Option D: increases the present value of future returns from investment and decreases investment

Correct Answer: decreases the present value of future return from investment and decreases investment ✔

Option A: Rs400.00

Option B: Rs 104.00

Option C: Rs 121.67

Option D: Rs 123.98

Correct Answer: Rs 121.67 ✔

Option A: stock markets tend to be inefficient

Option B: all of these answers

Option C: index funds are able to buy undervalued stocks

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

Correct Answer: actively managed funds trade more often and charge fees for their alleged expertise ✔

Option A: shares are overvalued

Option B: people behave irrationally when choosing shares

Option C: markets reflect all available information in a rational way

Option D: shares are undervalued

Correct Answer: markets reflect all available information in a rational way ✔

Option A: None of these answers

Option B: An increase in expected dividends

Option C: A reduction in aggregate risk

Option D: A reduction in the interest rate

Correct Answer: All of these answers ✔

Option A: shares tend to be overvalued

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

Option C: All of these answers

Option D: fundamental analysis is a valuable tool for increasing one’s returns from investing in shares

Correct Answer: the stock market is informationally efficient so share prices should follow a random walk ✔

Option A: lower return and a lower level or risk

Option B: lower return and a higher level of risk

Option C: higher return and a lower level or risk

Option D: higher return and a higher level of risk

Correct Answer: lower return and a lower level or risk ✔

Option A: uncertainty associated with the entire economy

Option B: uncertainty associated with specific companies

Option C: risk associated with adverse selection

Option D: risk associated with moral hazard

Correct Answer: uncertainty associated with specific companies ✔

Option A: increasing the rate of return within their portfolio

Option B: diversifying their portfolio

Option C: All of these answers help reduce risk

Option D: buying insurance

Correct Answer: increasing the rate of return within their portfolio ✔

Option A: one country will always have 2 percent more real GDP/person than the other

Option 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

Option C: the standard of living in the two countries will converge

Option D: Next year the country growing at 4 percent will have twice the GDP/person as the country growing at 2 percent

Correct 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 ✔

Option A: Rs 43,456,838

Option B: Rs 53,406,002

Option C: Rs 34,538,902

Option D: Rs 39,604,682

Correct Answer: Rs 39,604,682 ✔

Option A: future value

Option B: fair value

Option C: present value

Option D: compound value

Correct Answer: present value ✔