FIn 470 - Midterm 1 Exam Questions and
Answers
Risk - Ans:-numerical measure about the future payoff to an investment assessed over some time
horizon
Risk vs uncertainty - Ans:-risk can be quantified (measured)
uncertainty can not
5 characteristics of Risk - Ans:-1. risk can be quantified
- ...
variance - Ans:✔✔-average of the square deviations of the possible outcomes from their expected value,
weighted by their probabilities
1. compute expected value
2. subtract expected value from each of the possible payoffs and square the results
3. multiply each result by the probability
4. add up the results
*** compute variance and SD
- investment return $500 75% of the time and $2000 25% of the time - Ans:✔✔-1. (500 x .75) + (2000 x .
.25) = $875 = EV
2. (2,000 - 875 ) = (1125)^2 = 1,265,625
(500 - 875) = (-375) ^2 = 140625
3. .75 (140,625) + .25 (1,265,625) = 421,875= VAR
4. Sq rt 421,875 = 649.52 = Standar Dev
standard deviation - Ans:✔✔-the std dev is more useful because it deals in normal units, not squared
units (dollars sq)
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