CORP 2 - Chapter 13 Flashcards
(42 cards)
Risk is usually measured as the A. potential loss. B. variability of outcomes around some expected value. C. probability of expected values. D. potential expected loss.
Risk is usually measured as the
B. variability of outcomes around some expected value.
If three investment alternatives all have some degree of risk and different expected returns, which of the following measures could best be used to rank the risk levels of the projects? A. coefficient of correlation B. coefficient of variation C. standard deviation of returns D. net present value
If three investment alternatives all have some degree of risk and different expected returns, which of the following measures could best be used to rank the risk levels of the projects?
B. coefficient of variation
The term “risk averse” means that
A. an individual refuses to take risks.
B. most investors and businesspersons seek risk.
C. an individual will seek to avoid risk or be compensated with a higher return.
D. only investment proposals with no risk should be accepted.
The term “risk averse” means that
C. an individual will seek to avoid risk or be compensated with a higher return.
In order to reduce risk in a firm, the firm would seek to enter a business that
A. has high positive correlation with its present business.
B. has zero correlation with its present business.
C. has high negative correlation with its present business.
D. has high negative variation with its present business.
C. has high negative correlation with its present business.
The “efficient frontier” indicates
A. alternatives with neutral combinations of risk and return.
B. alternatives with the highest returns.
C. alternatives with the best combination of risk and return.
D. alternatives with no risk.
The “efficient frontier” indicates
C. alternatives with the best combination of risk and return.
Risk may be integrated into capital budgeting decisions by
A. adjusting the standard deviation of possible outcomes.
B. determining the expected value.
C. adjusting the discount rate.
D. adjusting the time horizon.
Risk may be integrated into capital budgeting decisions by
C. adjusting the discount rate.
Which of the following is a false statement?
A. risky investments may produce large losses
B. risky investments may produce large gains
C. the coefficient of variation is a risk measure
D. risk-averse investors cannot be induced to invest in risky assets
Which of the following is a false statement?
D. risk-averse investors cannot be induced to invest in risky assets
If one project has a higher standard deviation than another
A. it has a greater risk.
B. it has a higher expected value.
C. it has more possible outcomes.
D. it may be riskier, but this can only be determined by the coefficient of variation.
If one project has a higher standard deviation than another
D. it may be riskier, but this can only be determined by the coefficient of variation.
The firm's highest risk-adjusted discount should be applied to A. the repair of old machinery. B. a new product in a related field. C. a new product in a foreign market. D. the purchase of new equipment.
The firm’s highest risk-adjusted discount should be applied to
C. a new product in a foreign market.
The portfolio effect in capital budgeting refers to
A. the relationship of stocks to bonds.
B. the degree of correlation between various investments.
C. the coefficient of variation.
D. the risk-adjusted discount rate.
The portfolio effect in capital budgeting refers to
B. the degree of correlation between various investments.
An example of negative correlation may exist between the
A. forest products and housing industries.
B. jewellery and discount furniture industries.
C. steel and aluminum industries.
D. oil and auto industries.
An example of negative correlation may exist between the
B. jewellery and discount furniture industries.
A correlation coefficient of zero indicates
A. the projects have the same expected value.
B. there is no correlation and no risk reduction between combined projects.
C. there is no correlation, but some risk reduction when the projects are combined.
D. the projects have the same standard deviation.
A correlation coefficient of zero indicates
A. the projects have the same expected value.
C. there is no correlation, but some risk reduction when the projects are combined.
Which investment has the least amount of risk?
A. standard deviation = $500, expected return = $5,000
B. standard deviation = $700, expected return = $500
C. standard deviation = $900, expected return = $800
D. standard deviation = $400, expected return = $350
Block
Which investment has the least amount of risk?
A. standard deviation = $500, expected return = $5,000
In order to evaluate risk, management may also set qualitative risk classes. Rank these four projects from the least to the most risky. 1. completely new market in Canada 2. completely new market in South America 3. addition to normal product line 4. repair to old machinery A. 4, 3, 1, 2 B. 1, 2, 3, 4 C. 3, 4, 1, 2 D. 2, 3, 4, 1
In order to evaluate risk, management may also set qualitative risk classes. Rank these four projects from the least to the most risky.
- completely new market in Canada
- completely new market in South America
- addition to normal product line
- repair to old machinery
A. 4, 3, 1, 2
In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we
A. need to consider the impact of a given project on the overall risk of the firm.
B. recognize that a risky investment may create a portfolio with less risk.
C. need to consider how the returns of the projects in the portfolio are correlated.
D. all of the other answers are correct.
In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we
D. all of the other answers are correct.
A “what if” simulation using a computer helps to:
A. reduce the risk associated with a particular investment.
B. determine the effects of changes in certain variables.
C. increase the accuracy of the inputs.
D. more than one of the above are true
A “what if” simulation using a computer helps to:
B. determine the effects of changes in certain variables.
An analytical tool which helps to organize the decision process by presenting a graphical comparison of investment choices is called a(an) A. module hierarchy diagram. B. "what if" simulation. C. decision tree. D. none of the other answers are correct
An analytical tool which helps to organize the decision process by presenting a graphical comparison of investment choices is called a(an)
C. decision tree.
The lower the coefficient of correlation the greater the
A. risk when projects are combined.
B. risk reduction when projects are combined.
C. return when projects are combined.
D. standard deviation when projects are combined.
The lower the coefficient of correlation the greater the
B. risk reduction when projects are combined.
Simulation models allow the planner to
A. reduce the standard deviations of projects.
B. test possible changes in each variable.
C. deal with the uncertainty in forecasting outcomes.
D. two of the other answers are correct
Simulation models allow the planner to
D. two of the other answers are correct
Which of the following is a common approach in dealing with uncertainty? A. Monte Carlo simulation B. internal rate of return C. net present value D. beta analysis
Which of the following is a common approach in dealing with uncertainty?
A. Monte Carlo simulation
Using progressively higher discount rates
A. tends to penalize late flows more than early flows.
B. tends to penalize early flows more than late flows.
C. tends to lower net present value.
D. two of the other answers are correct
Using progressively higher discount rates
D. two of the other answers are correct
Using the risk-adjusted discount rate approach, projects with high coefficients of variation will have \_\_\_\_\_\_ net present values than projects with low coefficients of variation. A. somewhat higher B. substantially higher C. lower D. none of the other answers are correct
Using the risk-adjusted discount rate approach, projects with high coefficients of variation will have ______ net present values than projects with low coefficients of variation.
C. lower
A coefficient correlation of \_\_\_\_\_ provides no risk reduction. A. 0 B. - 1 C. + 1 D. +.5
A coefficient correlation of _____ provides no risk reduction.
C. + 1
A coefficient of \_\_\_\_\_ provides the greatest risk reduction. A. 0 B. - 1 C. + 1 D. +.5
A coefficient of _____ provides the greatest risk reduction.
B. - 1
