Economics Ch4

Chapter 4 questions and answers:

1) Which of the following can best be characterized as a "Black Swan" event?

A) decline in stock prices due to a recession

B) rising market interest rates as the Fed tightens monetary policy

C) a financial crisis causing credit to dry up

D) an individual firm unexpectedly filing for bankruptcy

Answer: C

2) In an article, "Preparing for the Next Black Swan" (Wall Street Journal, Aug 21, 2010), the point is made that diversification may be insufficient in protecting one's portfolio during a "Black Swan" event. Why may this be true?

A) virtually all asset classes may decline at the same time

B) investors may be unable to buy different assets during a "Black Swan" event

C) some assets may rise while others decline during a "Black Swan" event

D) Black Swan events are surprises and thus one cannot prepare for such an event.

Answer: A

3) Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. What is the expected rate of return on the stock?

A) -40%

B) -20%

C) 8%

D) 16%

Answer: C

4) Since all assets typically do not move together, how can investors typically reduce risk?

A) purchase only the best performing assets

B) diversify one's portfolio across different asset classes

C) avoid poor performing assets

D) actively manage one's portfolio

Answer: B

5) Which is the best example of idiosyncratic risk?

A) a financial crisis

B) a lawsuit because the corporation produced a faulty product

C) a recession

D) rising interest rates

Answer: B

6) The bond demand curve slopes down because

A) interest rates decline as bond prices decline.

B) when bond prices are low, inflation is low.

C) the lender is willing and able to purchase more bonds when the price of the bond is low.

D) the borrower is willing and able to purchase more bonds when the price of the bond is low....