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Risks And Diversification & Efficient Market Hypothesis
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Risks And Diversification & Efficient Market Hypothesis – MCQs
18 questions. Click to practice.
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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 undervalued
Exclusively when investors act irrationally
At moments when stocks are accurately priced
Because 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 20
Each of these options offers an equal reduction in risk
Expanding the portfolio from 1 stock to 10 stocks
Increasing 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?
data evaluation
risk assessment
fundamental analysis
portfolio diversification
financial auditing
4.
How does portfolio diversification impact the types of risks involved?
Lower overall market risk
Completely remove every type of risk
Raise the volatility of the portfolio’s returns
Decrease risk specific to individual assets
None 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 accurate
Every statement listed is accurate
They experience stronger negative feelings toward losses than positive feelings toward equivalent gains
The 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 investment
Reduces the present value of expected investment returns and leads to lower investment
Lowers the present value of anticipated investment returns but encourages increased investment
Increases the present value of expected investment returns but results in decreased investment
Has 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?
Rs 400.00
Rs 104.00
Rs 121.67
Rs 123.98
Rs 110.00
9.
Why is it challenging for actively managed investment funds to consistently outperform index funds?
Because stock markets often operate inefficiently
Due to all the reasons mentioned
Since index funds can invest in undervalued securities
Because 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 value
When investors make decisions based on emotions rather than logic
When markets efficiently incorporate all known information in a logical manner
When stocks are priced below their intrinsic worth
11.
Which of the following factors would lead to an increase in a stock's price?
None of the above
A rise in anticipated dividend payments
A decrease in overall market risk
A drop in prevailing interest rates
All of the above
12.
According to the efficient markets hypothesis, what is expected regarding stock prices?
Stocks are generally priced above their true value.
The stock market reflects all available information, causing prices to move unpredictably.
Every statement listed here is correct.
Using fundamental analysis consistently leads to higher investment returns.
13.
How does a portfolio with an equal split of 50% government bonds and 50% stocks compare to a portfolio made up solely of stocks in terms of return and risk?
It offers both a reduced return and decreased risk.
It delivers a lower return but increased risk.
It provides a higher return along with reduced risk.
It results in a higher return and greater risk.
14.
What does idiosyncratic risk refer to?
The risk linked to overall economic conditions
The uncertainty related to individual firms
The risk arising from adverse selection problems
The risk caused by moral hazard issues
15.
Which option does not contribute to lowering the risk individuals encounter?
boosting the expected returns on their investments
spreading investments across different assets
every option listed helps in risk reduction
purchasing insurance coverage
16.
If two nations begin with identical real GDP per capita, and one experiences a 2% growth rate while the other grows at 4%, what will happen over time?
One nation will consistently have a 2% higher real GDP per capita than the other.
The country with the 4% growth rate will see its living standards increasingly outpace the slower-growing nation due to the effects of compound growth.
The living standards of both countries will gradually become equal.
After one year, the nation growing at 4% will have double the GDP per capita of the one growing at 2%.
Both countries will maintain the same growth trajectory indefinitely.
17.
JCB, a manufacturer of agricultural and construction machinery, has the chance to buy a new factory today that will yield Rs 50 million after four years. Given an interest rate of 6%, what is the highest price JCB should pay for this project to be financially viable?
Rs 43,456,838
Rs 53,406,002
Rs 34,538,902
Rs 39,604,682
Rs 45,000,000
18.
What term describes the current amount of money required, based on current interest rates, to achieve a specified sum at a future date?
Value in the future
Equitable value
Present value
Accumulated value
Initial value