BMCH10TB.doc

BMCH10TB.doc

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ChapterTen

PrinciplesofRiskManagement

Thischaptercontains30multiplechoicequestions,10shortproblems,and5longerproblems.

MultipleChoice

1.________that“matters”becauseifaffectspeople'swelfare.________existswheneveronedoesnotknowforsurewhatwilloccurinthefuture.

（a）Uncertaintyisrisk;Uncertainty

（b）Riskisuncertainty;Uncertainty

（c）Riskisuncertainty;Risk

（d）Uncertaintyisrisk;Risk

Answer:

（b）

2.________isameasureofwillingnesstopaytoreduceone'sexposuretorisk.

（a）Riskaversion

（b）Riskavariciousness

（c）Riskpredilection

（d）Riskinflation

Answer:

（a）

3.Whenchoosingamonginvestmentalternativeswiththesameexpectedrateofreturn,ariskaverseindividualchoosestheonewiththe________risk.

（a）surest

（b）mostuncertain

（c）lowest

（d）highest

Answer:

（c）

4.________isaparticulartypeofriskpeoplefacebecauseofthenatureoftheirbusinessorpatternofconsumption.

（a）Operationalefficiencyexposure

（b）Opportunityexposure

（c）Riskexposure

（d）Riskreduction

Answer:

（c）

5.________areinvestorswhotakepositionsthatincreasetheirexposuretocertainrisksinthehopeofincreasingtheirwealth.

（a）Operationsinsurers

（b）Foreignexporters

（c）Hedgers

（d）Speculators

Answer:

（d）

6.Theriskinessofanassetoratransaction________beassessedinisolationorintheabstract.

（a）can

（b）cannot

（c）must

（d）itvariesaccordingtothesituation

Answer:

（b）

7.Bydefinition,________areinvestorswhotakepositionstoreducetheirexposures.

（a）operationsinsurers

（b）foreignexporters

（c）hedgers

（d）speculators

Answer:

（c）

8.Theriskoflossarisingfromobsolescenceduetotechnologicalchangeorchangesinconsumertasteisanexampleof________.

（a）unemploymentrisk

（b）liabilityrisk

（c）financial-assetrisk

（d）d consumer-durableassetrisk

Answer:

（d）

9.Theriskarisingfromholdingdifferentkindsoffinancialassetssuchasequitiesorfixedincomesecuritiesdenominatedinoneormorecurrenciesisanexampleof________.

（a）unemploymentrisk

（b）liabilityrisk

（c）financial-assetrisk

（d）consumer-durableassetrisk

Answer:

（c）

10.Businessrisksofthefirmarebornebyits________.

（a）shareholders

（b）creditors

（c）employees

（d）alloftheabove

Answer:

（d）

11.________consistsoffiguringoutwhatthemostimportantriskexposuresarefortheunitofanalysis.

（a）Riskassessment

（b）Selectionofriskmanagementtechniques

（c）Implementation

（d）Riskidentification

Answer:

（d）

12.Whichofthefollowingismostlikelytoneedalotoflifeinsurance?

（a）asinglepersonwithnodependents

（b）adivorcedpersonwithnodependents

（c）adouble-incomecouplewithnokids

（d）marriedpersonwithchildren

Answer:

（d）

13.________isthequantificationofthecostsassociatedwiththerisksthathavebeenidentifiedinthefirststepofriskmanagement.

（a）Riskassessment

（b）Selectionofriskmanagementtechniques

（c）Implementation

（d）Review

Answer:

（a）

14.Sellingariskyassettosomeoneelseandbuyinginsuranceareexamplesof________.

（a）riskavoidance

（b）losspreventionandcontrol

（c）risktransfer

（d）riskretention

Answer:

（c）

15.Oneissaidto________ariskwhentheactiontakentoreduceone’sexposuretoalossalsocausesonetogiveupthepossibilityofagain.

（a）insure

（b）diversify

（c）hedge

（d）payapremiumwith

Answer:

（c）

16.Whenyou________youpayapremiumtoeliminatetheriskoflossandretainthepotentialforgain.

（a）insure

（b）diversify

（c）hedge

（d）speculate

Answer:

（a）

17.Inorderfordiversificationtoreduceyourriskexposure,therisksmustbe________

（a）lessthanperfectlycorrelatedwitheachother

（b）morethanperfectlycorrelatedwitheachother

（c）uncorrelated

（d）noneoftheabove

Answer:

（a）

18.Thedemandforwaystomanageriskhasbeenincreasedby________.

（a）increasedvolatilityofexchangerates

（b）increasedvolatilityofinterestrates

（c）increasedvolatilityofcommodityprices

（d）alloftheabove

Answer:

（d）

19.Moralhazardandadverseselectionareexamplesof________.

（a）transactionscosts

（b）incentiveproblems

（c）transferencecosts

（d）bothaandb

Answer:

（b）

20.________isdefinedasquantitativeanalysisforoptimalriskmanagement.

（a）Portfoliotheory

（b）Corporatetheory

（c）Diversificationtheory

（d）Probabilitytheory

Answer:

（a）

21.Anassetportfolio'sexpectedreturnisidentifiedwiththe________ofthedistribution,anditsriskwiththe________.

（a）variance;average

（b）mean;standarddeviation

（c）standarddeviation;average

（d）median;normaldistribution

Answer:

（b）

22.SupposeyoubuysharesofRayFranstockatapriceof$110pershareandintendtoholdthemforayear.SupposeRayFranpaysadividendof$3.50pershareoverthatyear.ComputethetotalrateofreturnonashareofRayFranstockifattheendoftheyearyousellitfor$122.50pershare.

（a）10.20%

（b）11.36%

（c）13.06%

（d）14.55%

Answer:

（d）

23.The________astock'svolatility,the________therangeofpossibleoutcomesandthe________theprobabilitiesofthosereturnsattheextremesoftherange.

（a）larger;narrower;larger

（b）larger;narrower;smaller

（c）larger;wider;larger

（d）larger;wider;smaller

Answer:

（c）

24.ConsidertheprobabilitydistributionofrateofreturnonRayFranstock:

RateofReturn Probability

40% 0.25

15% 0.55

–8% 0.20

ComputetheexpectedrateofreturnonRayFranstock.

（a）9.75%

（b）15.60%

（c）16.65%

（d）19.85%

Answer:

（c）

25.Refertoquestion24.NowcomputethestandarddeviationofRayFranstock.

（a）12.95%

（b）13.10%

（c）16.10%

（d）25.90%

Answer:

（c）

26.Considerastockwithanexpectedreturnof15%andastandarddeviationof8%thatisnormallydistributed.Whatisthe0.95confidenceintervalforthisstock'srateofreturn?

（a）（7%,23%）

（b）（–9%,39%）

（c）（–1%,39%）

（d）（–1%,31%）

Answer:

（d）

Forquestions27through30,usethefollowingtable:

HistoricalReturns

Year

Toys’R’Me

S.A.O.Rouge

1

2

3

4

5

15%

20%

-5%

12%

10%

13%

17%

-7%

8%

6%

27.WhatarethemeanreturnsforToys’R’MeandS.A.O.Rouge,respectively?

（a）ToysRMe:

12.4%;S.A.O.Rouge:

10.2%

（b）ToysRMe:

10.4%;S.A.O.Rouge:

7.4%

（c）ToysRMe:

10.4%;S.A.O.Rouge:

10.2%

（d）ToysRMe:

7.4%;S.A.O.Rouge:

10.4%

Answer:

（b）

10-8

28.WhatisthestandarddeviationofreturnsforToysRMe?

ForS.A.O.Rouge?

（a）ToysRMe:

8.4%;S.A.O.Rouge:

7.4%

（b）ToysRMe:

8.40%;S.A.O.Rouge:

8.16%

（c）ToysRMe:

10.4%;S.A.O.Rouge:

7.4%

（d）ToysRMe:

10.4%;S.A.O.Rouge:

8.16%

Answer:

（b）

29.SupposethereturnsforToysRMeandS.A.O.Rougearenormallydistributed.Determinethe0.68confidenceintervalforToysR.Me.

（a）（8.4%,10.4%）

（b）（–14.8%,35.6%）

（c）（–6.4%,27.2%）

（d）（2.00%;18.80%）

Answer:

（d）

30.Determinethe0.95confidenceintervalforS.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）

ShortProblems

1.Brieflydistinguishbetweenthethreemethodsavailabletotransferrisk:

hedging,insuringanddiversifying.

Answer:

Hedging:

Oneissaidtohedgeariskwhentheactiontakentoreduceone’sexposuretoalossalsocausesonetogiveupthepossibilityofagain.

Insuring:

Insuringmeanspayingapremiumtoeliminatetheriskoflossandretainthepotentialforgain.

Diversifying:

Diversifyingmeansholdingsimilaramountsofmanyriskyassetsinsteadofconcentratingallofyourinvestmentinonlyone.Diversificationtherebylimitsyourexposuretotheriskofanysingleasset.

2.Outlinethestepsintherisk-managementprocess.

Answer:

Theriskmanagementprocesscanbebrokendownintofivesteps:

1.Riskidentification

2.Riskassessment

3.Selectionofriskmanagementtechniques

4.Implementation

5.Review

3.Thinkofabookstore.Whatrisksissuchabusinessexposedto,andwhobearsthem?

Answer:

Majorrisks:

Riskthatinventorywillnotarriveontime

Riskthatemployeeswillbelateorabsent

Riskthatcomputers/registerswillbreakdown

Riskofnewcompetitioninthearea（especially-the“superstores”）

Riskthatdistributors'priceswillincreasedramatically

Theserisksarebornebyshareholders,owners,employees,creditors,customers,suppliers.

4.Explainwhythesale/purchaseofahouseissimilartoaforwardcontractinnature.

Answer:

Bothpartieseliminatetheuncertaintyassociatedwithpricevolatilityinthehousingmarketduringthemonthsofsettlingthecontractbetweenthem.Eventhoughthetransferofownershipforthehousewon'thappenformanymonths,thebuyerandsellerofahousecancontractuallysettleonatransactionpriceforthehouse.

5.Explainthedifferencebetweeninsuringandhedging.

Answer:

Whenyouhedge,youeliminatetheriskoflossbygivingupthepotentialforgain.However,whenyouinsure,youpayapremiumtoeliminatetheriskoflossandretainthepotentialforgain.

6.Discussthetwofactorslimitingtheefficientallocationofrisks.

Answer:

Transactionscostsandincentiveproblemsarethetwokeyfactorslimitingtheefficientallocationofrisks.Transactionscostsincludethecostsofestablishingandrunninginstitutionssuchasinsurancecompaniesorsecuritiesexchangesandthecostsofwritingandenforcingcontracts.

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