Question

19. The risk premium compensates investors for:

A. Foreign exchange.

B. Changing interest rates.

C. Exposure to inflation.

D.Assuming the risks of the investment.

25. common pattern for individuals is to:

A. Be surplus-budget units when young and balanced-budget units when older.

B. Be balanced-budget units when young and deficit budget units when older.

C. Be surplus-budget units when young and deficit-budget units when older.

D. Be deficit-budget units when young and surplus-budget units when older.

26. in direct transfer of funds, the parties:

A. Use a financial intermediary.

B. Use a broker.

C. Use the government.

D. Know each other.

32. the relationship between risk and return in financial markets can be summarized by saying:

A. The more risk, the more the actual return an investor will receive.

B. The more risk, the greater the return demanded by investors.

C. The more risk, the less the actual return an investor will receive.

D. The more risk, the less the return demanded by investors.

Answer 1

19. Option D

Risk premium is the excess return demanded by investors over the risk free rate for bearing excess risk.

All other options are irrelevant for this, all the other options are taken care of by changing forex rates.

25. Option C

Individuals earn more than they spend when they are young, leading to savings and investment, i.e. having surplus budget when they are young; these savings and investment are used by them when they grow old when they have no source of income but expenditure persists i.e. having a deficit budget when they are old.

26. Option D

In direct transfers party know each other and transact through mobile apps and financial intermediary or brokers don't play any role in it, hence the term direct.

32.Option B

As the risk of an investment increases, higher amount of return is demanded by investors, actual return may be high or low depending on performance of the investment, it is evident also from CAPM where,

Required Return = Risk free rate + Beta * Risk Premium

Where Beta which is a measure of risk and as risk or beta increases, required return also increases.