Finance 361 Exam 1 Questions with Complete Solutions.
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Course
Finance 361
Institution
Finance 361
Finance361Exam1QuestionswithComplete
Solutions.
What is the life cycle and what are the 4 important components? - Correct Answer Human
Capital vs Financial Capital throughout life
1.) Real Wage Income
2.) Health Care
3.) Discretionary
4.) Core
What is the difference between human and financ...
Finance 361 Exam 1 Questions with Complete
Solutions.
What is the life cycle and what are the 4 important components? - Correct Answer Human
Capital vs Financial Capital throughout life
1.) Real Wage Income
2.) Health Care
3.) Discretionary
4.) Core
What is the difference between human and financial capital? - Correct Answer -Human
Capital (HC) is one's ability to generate income (time in labor force)-HC decays over time
from beginning of work-retirement age-Therefore, younger individuals have higher NPV of
HC since they have more time left to work
-Financial Capital (FC) increases until you reach retirement-FC decays afterward
because of spending needed to maintain standard of living-Prudent planners likely have a
horizontal slope of FC after retirement (rather than a decaying one
What is your most important asset? - Correct Answer
What are life cycle risks and why do they have to be managed? - Correct Answer
What is Risk? - Correct Answer Conditions of uncertainty when one outcome has an
undesirable negative consequence
What is Uncertainty? - Correct Answer Two potential outcomes for an event or situation
What are the two components necessary to define risk? - Correct Answer
What is risk from the standpoint of the individual? - Correct Answer Possibility of loss
What is risk from the standpoint of an insurance company or large organization? - Correct
Answer Actual losses will be greater than expected losses
, Why does "decision making" involve risk? - Correct Answer
What are the three attitudes that individuals have towards risk? Which is most prevelant? -
Correct Answer 1.) Risk Adverse C
2.) Risk Seeker
3.) Risk Neutral
What is Risk Adverse? - Correct Answer Refers to shying away from risks and preferring
to have as much security and certainty as is reasonably affordable.
What is Risk Seeker? - Correct Answer Is someone who will enter into an endeavor as
long as a positive long run return on the money is possible, however unlikely.
What is Risk Neutral? - Correct Answer Attitude is seen when one's risk preference lies
between the extremes of risk averse and risk seeking.
What are the 7 Types of Risks and what do they mean? - Correct Answer 1.) Pure:
outcome-loss/no chance of gain.
2.) Speculative (investment): outcome-gain/ lose.
3.) Idiosyncratic: risk unique to an individual or a corporate entity (diversifiable).
4.) Systematic: risks that are pervasive to and affect the market or broad market sectors
(non diversifiable).
5.) Systemic: risks that are global or capable of causing a contagion (non diversifiable).
6.) Fundamental (basic) risk: risk that impacts a large number in a group (basic to a large
number).
7.) Enterprise risk: holistic approach to firm specific risks
How does a pure risk differ from an investment (speculative) risk? - Correct Answer Pure
risk is something insurable, while speculative risk is not. Pure risk is the risk that either
something will happen causing a loss, or nothing will happen. Speculative risk is the risk
that something will happen causing a loss, or something could happen leading to a gain.
What types of pure risks are you exposed to? - Correct Answer
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