Risks And Diversification & Efficient Market Hypothesis

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Correct options are highlighted when revealed.

1.When do speculative bubbles tend to form in the stock market?

In times of severe negative sentiment when many shares are undervaluedExclusively when investors act irrationallyAt moments when stocks are accurately pricedBecause logical investors might purchase overpriced shares hoping to resell them at a higher price later

2.Which action leads to the largest decrease in portfolio risk?

Raising the number of stocks from 10 to 20Each of these options offers an equal reduction in riskExpanding the portfolio from 1 stock to 10 stocksIncreasing the stock count from 20 to 30

3.What is the term for examining a company's financial reports and future potential to assess its worth?

4.How does portfolio diversification impact the types of risks involved?

Lower overall market riskCompletely remove every type of riskRaise the volatility of the portfolio’s returnsDecrease risk specific to individual assetsNone of the above

5.Which scenario best illustrates the concept of moral hazard?

Once Gull obtains fire insurance, he starts smoking cigarettes while lying in bed.None of the given situations represent moral hazard.Mahmood, feeling unwell, decides to purchase health insurance.Every example provided reflects moral hazard.

6.What is true about individuals who are risk averse?

None of the statements provided are accurateEvery statement listed is accurateThey experience stronger negative feelings toward losses than positive feelings toward equivalent gainsThe disutility from losing Rs 50 surpasses the utility gained from winning Rs 50

7.How does a rise in the current interest rate affect the present value of expected investment returns and the level of investment?

Raises the present value of anticipated investment returns and stimulates more investmentReduces the present value of expected investment returns and leads to lower investmentLowers the present value of anticipated investment returns but encourages increased investmentIncreases the present value of expected investment returns but results in decreased investmentHas no impact on the present value of investment returns or on investment levels

8.If someone deposits Rs 100 in a bank account with an annual compound interest rate of 4%, what will be the total balance after five years?

9.Why is it challenging for actively managed investment funds to consistently outperform index funds?

Because stock markets often operate inefficientlyDue to all the reasons mentionedSince index funds can invest in undervalued securitiesBecause actively managed funds incur higher trading frequency and charge fees for their claimed skill

10.Under what condition do stock prices exhibit a random walk behavior?

When stocks are priced higher than their true valueWhen investors make decisions based on emotions rather than logicWhen markets efficiently incorporate all known information in a logical mannerWhen stocks are priced below their intrinsic worth

Risks And Diversification &amp; Efficient Market Hypothesis

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