Question

If the Federal Reserve takes actions to raise interest rates in the economy, this will most likely affect which of these risks facing businesses in the United States?
Interest rate risk

A. Financial risk

B. Tax risk

C. Business risk

What must the probabilities of the different states of nature sum to?
A. 0.0

B. 1.0

C. 100.0

D. -1.0

How is the expected return computed?
A. By multiplying the probability of each state of nature with its return and add them together

B. By multiplying the probability of each state of nature with its return, add them together, and

divide by n, the number of states of nature

C. By adding the returns from each state of nature and divide by the number of states of nature

D. By finding the scenario with the highest probably of occurrence and use the corresponding return as the expected return estimate

Which of these processes incorporates many different combinations of variables while running the analysis several thousands of times when creating a forecast?
Expected returns

A. Scenario analysis

B. States of nature

C. Simulation

Which of the following are true?
A. Statement 1: Common stocks are a guaranteed investment for generating high returns next year.

B. Statement 2. Treasury bond returns will always exceed the inflation rate.

C. Statement 1 only

D. Statement 2 only

E. Both statements 1 and 2

F. Neither statement 1 or 2

Answer 1

Answer:

1. A. Financial risk

2. B. 1.0

3.A. By multiplying the probability of each state of nature with its return and add them together

4. C. Simulation

5. F. Neither statement 1 or 2

Explanation:

When the Central banks takes action to increase interest rates in the economy, they do so by controlling money supply. This will have an impact on the financial risk facing businesses in the US.

All probabilities must always add up to 1 to show that the events are mutually exclusive.

When computing expected return, you add up the products of all the returns given a particular probability that a state of nature will occur.

By using a Simulation, one can combine multiple variables to find out how they can relate and what will happen if they do to be able to create a clearer picture of the future.

Both statements are wrong because firstly, there is no such thing as a guaranteed investment especially when it comes to stock. Secondly, Treasury bonds will not always exceed inflation rates.