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Some examples from this set of practice questions
1.
Why was the Yale portfolio primarily in bonds and other “safe” investments?
Answer: Yale did not want the strong variation that are common in investment
2.
Which of the following is NOT an example of moral hazard?
Answer: Knowingly building a house in an area susceptible to floods
3.
All rational investors, seeking to manage risk by optimally diversifying across a common set of different assets:
Answer: Ultimately earn the same return if they share the same level of risk-aversion.
4.
If you want to protect the risk consisting in the fluctuations of the value of your home, you would ideally:
Answer: Want to short the market for homes in your city.
5.
Regarding the Efficient Market Hypothesis:
Answer: The semi-strong form states all publicly available information about a firm’s prospects are reflected within the firm’s stock price.
6.
Nastya’s makes risky investments with 25% of her portfolio and invests the rest of the portfolio in low-variance investments. This is an example of
Answer: Mental compartmentalization
7.
Today, the nominal rate of interest is 6% and the inflation rate is 2%. The real rate of interest is therefore:
Answer: 4%
8.
The potential upside of share dilution is that:
Answer: The capital received by the company after the dilution can improve the company’s profitability and its stock price.
9.
If both dividends and capital gains are taxed at the same ordinary income tax rate, some difference in the tax effect still exists because:
Answer: Dividends are immediately taxed while capital gains are deferred until the stock is sold
10.
What was the major sign that lead Professor Shiller to predict the crash of the housing market?
Answer: Housing prices had been relatively constant for 100 years, but then suddenly started to rise.
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