risks and diversification efficient market hypothesis Mcqs
1. Share prices will follow a random walk if ?
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A. people behave irrationally when choosing shares

B. shares are overvalued

C. markets reflect all available information in a rational way

D. shares are undervalued

2. Which of the following reduces risk in a portfolio the greatest ?
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A. Increasing the number of shares in the portfolio from 1 to 10

B. Increasing the number of shares from 10 to 20

C. All of these answers provide the same amount of risk reduction

D. Increasing the number of shares from 20 to 30

3. The study of a companys accounting statements and future prospects to determine its value is known as ?
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A. diversification

B. information analysis

C. risk management

D. fundamental analysis
4. Diversification of portfolio can ?
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A. reduce aggregate risk

B. eliminate all risk

C. increase the standard deviation of the portfolios return

D. reduce idiosyncratic risk
5. Compared to a portfolio composed entirely of shares a portfolio that is 50 percent government bonds and 50 percent shares will have a ?
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A. lower return and a higher level of risk

B. lower return and a lower level or risk

C. higher return and a higher level of risk

D. higher return and a lower level or risk

6. If people are risk averse, then ?
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A. All of these answers are true

B. None of these answers are true

C. ir utility function exhibit the property of diminishing marginal utility of wealth

D. They dislike bad things more than the like comparable good things

E. The utility they would lose from losing a Rs50 bet would exceed the utility they would gain from winning a Rs 50 bet

7. Which of the following should cause the price of a share of stock to rise ?
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A. An increase in expected dividends

B. All of these answers

C. A reduction in the interest rate

D. A reduction in aggregate risk

E. None of these answers

8. Idiosyncratic risk is the ?
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A. uncertainty associated with the entire economy

B. risk associated with adverse selection

C. uncertainty associated with specific companies

D. risk associated with moral hazard

9. An increase in the prevailing interest rate ?
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A. decreases the present value of future return from investment and decreases investment

B. increases the present value of future returns from investment and increases investment

C. increases the present value of future returns from investment and decreases investment

D. decreases the present value of future returns from investment and increase investment

10. Which of the following does not help reduce the risk that people face ?
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A. diversifying their portfolio

B. All of these answers help reduce risk

C. buying insurance

D. increasing the rate of return within their portfolio
11. The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as ?
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A. compound value

B. present value

C. fair value

D. future value

E. beginning value

12. It is difficult for an actively managed investment fund to outperform an index fund because ?
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A. all of these answers

B. index funds are able to buy undervalued stocks

C. stock markets tend to be inefficient

D. actively managed funds trade more often and charge fees for their alleged expertise
13. If a depositor puts Rs100 in a bank amount that earns 4 percent interest compounded annually, how much will be in the account after five years ?
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A. Rs 121.67

B. Rs 123.98

C. Rs400.00

D. Rs 104.00

14. If two countries start with the same real GDP/person and one country grows at 2 percent while the other grows at 4 percent ?
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A. the standard of living in the two countries will converge

B. the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth

C. Next year the country growing at 4 percent will have twice the GDP/person as the country growing at 2 percent

D. one country will always have 2 percent more real GDP/person than the other

15. Which of the following is an example of moral hazard ?
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A. None of these answers demonstrate moral hazard

B. After Gull buys fire insurance, he begins to smoke cigarettes in bed.

C. All of these answers demonstrate moral hazard

D. Mahmood has been feeling poorly lately so he seeks health insurance

16. If the efficient markets hypothesis is true, then ?
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A. shares tend to be overvalued

B. fundamental analysis is a valuable tool for increasing ones returns from investing in shares

C. All of these answers

D. the stock market is informationally efficient so share prices should follow a random walk
17. JCB (Which makes agricultural and construction equipment) has the opportunity to purchase a new factory today that will provide them with a Rs50 million return four years from now If prevailing interest rates are 6 percent, what is the maximum that the project can cost for JCB to be willing to undertake the project ?
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A. Rs 34,538,902

B. Rs 53,406,002

C. Rs 39,604,682

D. Rs 43,456,838

18. Speculative bubbles may occur in the shares market ?
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A. when stocks are fairly valued

B. because rational people may buy an overvalued share if they think they can sell it to someone for even more at a later date

C. during periods of extreme pessimism because so many stocks become undervalued

D. only when people are irrational