1.1 You invest $100,000 in only one stock. What kind of risk will you primarily be exposed to?:
a) Stand alone risk
OR
b) Porfolio Risk
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1.2 Generally, investors would prefer to invest in assets that have:
a) A lower-than-average expected rate of return given its perceived risk
OR
b) A higher-than-average expected rate of return given its perceived risk
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1.3
Suppose an investor is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.
Option |
Payoff One Year from Now |
|---|
1 |
100% chance of receiving $1,100. |
2 |
50% chance of receiving $1,000 and 50% chance of receiving $1,200. |
3 |
50% chance of receiving $200 and 50% chance of receiving $2,000. |
1) Which of the following would a risk-averse investor prefer?
a) The investor will choose option 1.
b) The investor will choose option 2.
c) The investor will choose option 3.
d) The investor will be indifferent toward these options.
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2) In contrast, Nick's brother, Sam, is risk averse. Which of the following statements is true about Sam?
a) Everything else remaining constant, he prefers Option 3.
b) Everything else remaining constant, he prefers Option 2.
c) Everything else remaining constant, he prefers Option 1.