Week 2 Quiz

1. A stress test: (check all that apply)

A. Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises. B. Tries to incorporate all the interconnections between financial institutions. D. Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc.

2. A 5% 3-month Value At Risk (VaR) of $1 million represents: B. A 5% chance of the asset declining in value by $1 million during the 3-month time frame. C. A 5% decline in the value of the asset after 3 month, per each $1 million of notional. D. The likelihood of a 5% of $1 million decline in the asset over the next 3-month.

4. Market (or systematic) risk ___________ whereas idiosyncratic risk

__________.

A. Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset. Is the risk which is endemic to a specific asset and therefore not the market as a whole. C. Is the risk for an asset to experience losses due to factors that affect the entire stock market Is the risk which is endemic to a specific asset and therefore not the market as a whole. D. Is the risk for an asset to not be able to be traded in the market at a later time Is the risk for an asset to experience losses due to factors that affect the entire stock market

5. Why might an investor not normally invest large sums of money into Walmart or Apple stock? A. Both companies have received extensive media coverage. B. Their stock prices closely track the S&P500 C. Their stock prices are highly volatile, and thus carry a lot of risk

6. Why is the normal distribution not a good model of some financial data? B. It does not have many outliers C. Extreme events occur in it too often D. The standard deviation is too low