BMCH10TB.doc

1、Chapter TenPrinciples of Risk ManagementThis chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems.Multiple Choice1. _ that “matters” because if affects peoples welfare. _ exists whenever one does not know for sure what will occur in the future.(a) Uncertainty is ri

2、sk; Uncertainty(b) Risk is uncertainty; Uncertainty(c) Risk is uncertainty; Risk(d) Uncertainty is risk; RiskAnswer: (b)2. _ is a measure of willingness to pay to reduce ones exposure to risk. (a) Risk aversion(b) Risk avariciousness(c) Risk predilection(d) Risk inflationAnswer: (a)3. When choosing

3、among investment alternatives with the same expected rate of return, a risk averse individual chooses the one with the _ risk.(a) surest(b) most uncertain(c) lowest (d) highestAnswer: (c)4. _ is a particular type of risk people face because of the nature of their business or pattern of consumption.(

4、a) Operational efficiency exposure(b) Opportunity exposure(c) Risk exposure(d) Risk reductionAnswer: (c)5. _ are investors who take positions that increase their exposure to certain risks in the hope of increasing their wealth.(a) Operations insurers(b) Foreign exporters(c) Hedgers(d) SpeculatorsAns

5、wer: (d)6. The riskiness of an asset or a transaction _ be assessed in isolation or in the abstract.(a) can (b) cannot(c) must(d) it varies according to the situationAnswer: (b)7. By definition, _ are investors who take positions to reduce their exposures.(a) operations insurers(b) foreign exporters

6、(c) hedgers(d) speculatorsAnswer: (c)8. The risk of loss arising from obsolescence due to technological change or changes in consumer taste is an example of _.(a) unemployment risk(b) liability risk(c) financial-asset risk(d) dconsumer-durable asset riskAnswer: (d)9. The risk arising from holding di

7、fferent kinds of financial assets such as equities or fixed income securities denominated in one or more currencies is an example of _.(a) unemployment risk(b) liability risk(c) financial-asset risk(d) consumer-durable asset riskAnswer: (c)10. Business risks of the firm are borne by its _.(a) shareh

8、olders(b) creditors(c) employees(d) all of the aboveAnswer: (d)11. _ consists of figuring out what the most important risk exposures are for the unit of analysis.(a) Risk assessment(b) Selection of risk management techniques(c) Implementation(d) Risk identificationAnswer: (d)12. Which of the followi

9、ng is most likely to need a lot of life insurance?(a) a single person with no dependents(b) a divorced person with no dependents(c) a double-income couple with no kids(d) married person with childrenAnswer: (d)13. _ is the quantification of the costs associated with the risks that have been identifi

10、ed in the first step of risk management.(a) Risk assessment(b) Selection of risk management techniques(c) Implementation(d) ReviewAnswer: (a)14. Selling a risky asset to someone else and buying insurance are examples of _.(a) risk avoidance(b) loss prevention and control(c) risk transfer(d) risk ret

11、entionAnswer: (c)15. One is said to _ a risk when the action taken to reduce ones exposure to a loss also causes one to give up the possibility of a gain.(a) insure(b) diversify(c) hedge(d) pay a premium withAnswer: (c)16. When you _ you pay a premium to eliminate the risk of loss and retain the pot

12、ential for gain.(a) insure(b) diversify(c) hedge(d) speculateAnswer: (a)17. In order for diversification to reduce your risk exposure, the risks must be _(a) less than perfectly correlated with each other(b) more than perfectly correlated with each other(c) uncorrelated(d) none of the aboveAnswer: (

13、a)18. The demand for ways to manage risk has been increased by _.(a) increased volatility of exchange rates(b) increased volatility of interest rates(c) increased volatility of commodity prices(d) all of the aboveAnswer: (d)19. Moral hazard and adverse selection are examples of _.(a) transactions co

14、sts(b) incentive problems(c) transference costs(d) both a and bAnswer: (b)20. _ is defined as quantitative analysis for optimal risk management.(a) Portfolio theory(b) Corporate theory(c) Diversification theory(d) Probability theoryAnswer: (a)21. An asset portfolios expected return is identified wit

15、h the _ of the distribution, and its risk with the _.(a) variance; average(b) mean; standard deviation(c) standard deviation; average(d) median; normal distributionAnswer: (b)22. Suppose you buy shares of RayFran stock at a price of $110 per share and intend to hold them for a year. Suppose RayFran

16、pays a dividend of $3.50 per share over that year. Compute the total rate of return on a share of RayFran stock if at the end of the year you sell it for $122.50 per share.(a) 10.20%(b) 11.36%(c) 13.06%(d) 14.55%Answer: (d)23. The _ a stocks volatility, the _ the range of possible outcomes and the _

17、 the probabilities of those returns at the extremes of the range.(a) larger; narrower; larger(b) larger; narrower; smaller(c) larger; wider; larger(d) larger; wider; smallerAnswer: (c)24. Consider the probability distribution of rate of return on RayFran stock:Rate of Return Probability40% 0.2515% 0

18、.558% 0.20Compute the expected rate of return on RayFran stock.(a) 9.75%(b) 15.60%(c) 16.65%(d) 19.85%Answer: (c)25. Refer to question 24. Now compute the standard deviation of RayFran stock.(a) 12.95%(b) 13.10%(c) 16.10%(d) 25.90%Answer: (c)26. Consider a stock with an expected return of 15% and a

19、standard deviation of 8% that is normally distributed. What is the 0.95 confidence interval for this stocks rate of return?(a) (7%, 23%)(b) (9%, 39%)(c) (1%, 39%)(d) (1%, 31%)Answer: (d)For questions 27 through 30, use the following table:Historical ReturnsYearToysRMeS.A.O. Rouge1234515%20%-5%12%10%

20、13%17%-7%8%6%27. What are the mean returns for ToysRMe and S.A.O. Rouge, respectively?(a) Toys R Me: 12.4%; S.A.O. Rouge: 10.2%(b) Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(c) Toys R Me: 10.4%; S.A.O. Rouge: 10.2%(d) Toys R Me: 7.4%; S.A.O. Rouge: 10.4%Answer: (b)10-828. What is the standard deviation of

21、 returns for Toys R Me? For S.A.O. Rouge?(a) Toys R Me: 8.4%; S.A.O. Rouge: 7.4%(b) Toys R Me: 8.40%; S.A.O. Rouge: 8.16%(c) Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(d) Toys R Me: 10.4%; S.A.O. Rouge: 8.16%Answer: (b)29. Suppose the returns for Toys R Me and S.A.O. Rouge are normally distributed. Determ

22、ine the 0.68 confidence interval for Toys R. Me.(a) (8.4%, 10.4%)(b) (14.8%, 35.6%)(c) (6.4%, 27.2%)(d) (2.00%; 18.80%)Answer: (d)30. Determine the 0.95 confidence interval for S.A.O. Rouge.(a) (7.14%, 8.16%)(b) (0.76, 15.56%)(c) (-8.92, 23.72%)(d) (17.08, 31.88%)Answer: (c)Short Problems1. Briefly

23、distinguish between the three methods available to transfer risk: hedging, insuring and diversifying.Answer:Hedging: One is said to hedge a risk when the action taken to reduce ones exposure to a loss also causes one to give up the possibility of a gain.Insuring: Insuring means paying a premium to e

24、liminate the risk of loss and retain the potential for gain.Diversifying: Diversifying means holding similar amounts of many risky assets instead of concentrating all of your investment in only one. Diversification thereby limits your exposure to the risk of any single asset.2. Outline the steps in

25、the risk-management process.Answer:The risk management process can be broken down into five steps:1. Risk identification2. Risk assessment3. Selection of risk management techniques4. Implementation5. Review3. Think of a bookstore. What risks is such a business exposed to, and who bears them?Answer:M

26、ajor risks:Risk that inventory will not arrive on timeRisk that employees will be late or absentRisk that computers/registers will break downRisk of new competition in the area (especially - the “superstores”)Risk that distributors prices will increase dramatically These risks are borne by sharehold

27、ers, owners, employees, creditors, customers, suppliers.4. Explain why the sale/purchase of a house is similar to a forward contract in nature.Answer:Both parties eliminate the uncertainty associated with price volatility in the housing market during the months of settling the contract between them.

28、 Even though the transfer of ownership for the house wont happen for many months, the buyer and seller of a house can contractually settle on a transaction price for the house.5. Explain the difference between insuring and hedging.Answer:When you hedge, you eliminate the risk of loss by giving up th

29、e potential for gain. However, when you insure, you pay a premium to eliminate the risk of loss and retain the potential for gain.6. Discuss the two factors limiting the efficient allocation of risks.Answer:Transactions costs and incentive problems are the two key factors limiting the efficient allocation of risks. Transactions costs include the costs of establishing and running institutions such as insurance companies or securities exchanges and the costs of writing and enforcing contracts.Moral h