Risk and Return MCQs 2026

Systematic risk is caused by factors such as

1. Aa single firm's management decisions✓
2. Bone product recall✓
3. Ceconomy-wide events like interest rates, inflation and recessions✓
4. Da company lawsuit✓

Beta of a security measures its

1. Atotal risk✓
2. Bdividend growth✓
3. Csystematic risk relative to the market✓
4. Dliquidity✓

Non-diversifiable risk is also called

1. Aspecific risk✓
2. Bsystematic (market) risk✓
3. Cbusiness risk only✓
4. Dfirm-specific risk✓

According to CAPM, required return equals the risk-free rate plus beta times the

1. Amarket risk premium✓
2. Binflation rate✓
3. Ccoupon rate✓
4. Ddividend yield✓

Diversifiable risk is also called

1. Amarket risk✓
2. Bsystematic risk✓
3. Cinterest-rate risk✓
4. Dunsystematic (specific) risk✓

The risk-free rate of return is typically proxied by

1. Acorporate bond yields✓
2. Bequity market returns✓
3. Cshort-term government treasury bill yields✓
4. Dreal estate returns✓

The risk premium is the

1. Aextra return demanded above the risk-free rate for taking on risk✓
2. Brisk-free rate itself✓
3. Cinflation rate✓
4. Dtax rate✓

The real rate of return is approximately the nominal return minus the

1. Ainflation rate✓
2. Btax rate✓
3. Crisk-free rate✓
4. Dbeta✓

Offered two investments with equal expected returns, a risk-averse investor will prefer the one with

1. Ahigher risk✓
2. Bunknown risk✓
3. Chigher fees✓
4. Dlower risk✓

The risk-return trade-off principle states that

1. Ahigher risk always means lower return✓
2. Bhigher expected return generally requires accepting higher risk✓
3. Crisk and return are unrelated✓
4. Dlow risk always gives high return✓

The coefficient of variation is useful because it measures

1. Atotal return✓
2. Brisk per unit of return, allowing comparison of investments✓
3. Cbeta✓
4. Dthe dividend yield✓

Variance and standard deviation measure the

1. Aaverage return✓
2. Brisk-free rate✓
3. Cbeta✓
4. Ddispersion of returns around the mean✓

The most common statistical measure of an investment's total risk is the

1. Astandard deviation of returns✓
2. Bmean return✓
3. Cmedian return✓
4. Dmodal return✓

Interest-rate risk is the danger that

1. Aa firm defaults on its debt✓
2. Bcurrency values change✓
3. Cchanging interest rates reduce an investment's value, especially bonds✓
4. Dinflation disappears✓

In finance, risk is generally defined as

1. Aa certain loss✓
2. Ba guaranteed gain✓
3. Cthe uncertainty or variability of returns✓
4. Dthe tax rate✓

Default (credit) risk refers to the possibility that

1. Ainterest rates rise✓
2. Bthe whole market crashes✓
3. Cthe currency devalues✓
4. Da borrower fails to make promised payments✓

Liquidity risk is the risk that

1. Aprices always rise✓
2. Ban asset cannot be sold quickly without a significant price concession✓
3. Cdividends are cut✓
4. Dinflation rises sharply✓

Expected return is best described as

1. Athe highest possible return✓
2. Ba guaranteed return✓
3. Clast year's return✓
4. Dthe probability-weighted average of possible returns✓

The holding period return equals (ending value minus beginning value plus income) divided by

1. Athe ending value✓
2. Bthe beginning value✓
3. Cthe average value✓
4. Dthe income received✓

The total return on a stock consists of

1. Adividends only✓
2. Bcapital gain only✓
3. Cdividend income plus capital gain or loss✓
4. Dinterest only✓

Inflation (purchasing-power) risk is the danger that

1. Anominal returns fall to zero✓
2. Bthe firm defaults✓
3. Crising prices erode the real value of returns✓
4. Dthe stock splits✓

Exchange-rate risk mainly affects

1. Apurely domestic investments✓
2. Binvestments with foreign-currency cash flows✓
3. Ctreasury bills✓
4. Dcash held at home✓

Business risk arises from

1. Athe variability of a firm's operating income✓
2. Bthe use of debt only✓
3. Cexchange rates only✓
4. Dinflation only✓

Financial risk arises specifically from a firm's use of

1. Aequity only✓
2. Bcash reserves✓
3. Cinventory✓
4. Ddebt (financial leverage)✓

In finance, the term return refers to

1. Athe gain or loss on an investment over a period✓
2. Bthe initial cost only✓
3. Cthe tax paid on the investment✓
4. Dthe broker's commission✓

A probability distribution of returns that is more spread out indicates

1. Alower risk✓
2. Bhigher risk✓
3. Czero risk✓
4. Da guaranteed return✓

The arithmetic mean return tends to be

1. Ahigher than or equal to the geometric mean return✓
2. Balways lower than the geometric mean✓
3. Cunrelated to the geometric mean✓
4. Dalways exactly equal to the geometric mean✓

The geometric mean return is preferred for measuring

1. Aa single period return✓
2. Bexpected future return✓
3. Cthe compound rate of growth over multiple periods✓
4. Dthe risk-free rate✓

Capital gain yield is the

1. Adividend divided by price✓
2. Bcoupon divided by par✓
3. Ctotal return✓
4. Dpercentage change in the price of an asset✓

Between an investment with 12% return and 4% standard deviation and one with 12% return and 8% standard deviation, a risk-averse investor prefers

1. Athe second one✓
2. Bneither✓
3. Cboth equally✓
4. Dthe first (lower standard deviation)✓

Standard deviation is expressed in the

1. Asame units as the returns (percentage)✓
2. Bunits of beta✓
3. Cunits of time✓
4. Dcurrency of the country only✓

Adding more uncorrelated assets to a portfolio primarily reduces

1. Aunsystematic risk✓
2. Bsystematic risk✓
3. Cthe expected return✓
4. Dthe risk-free rate✓

An investor who requires a very high premium to bear risk is described as highly

1. Arisk-neutral✓
2. Brisk-averse✓
3. Crisk-seeking✓
4. Dindifferent✓

A risk-neutral investor makes decisions based solely on

1. Arisk✓
2. Bstandard deviation✓
3. Cbeta✓
4. Dexpected return, ignoring risk✓

Two investments are best compared for risk relative to return using the

1. Abeta only✓
2. Bmean only✓
3. Ccoefficient of variation✓
4. Dmode✓

The Security Market Line expresses the relationship between required return and

1. Astandard deviation✓
2. Bbeta✓
3. Ctime✓
4. Ddividends✓

A negative expected return means investors expect, on average, to

1. Alose money✓
2. Bgain money✓
3. Cbreak even always✓
4. Dearn the risk-free rate✓

Overall, the fundamental relationship in investing is that risk and expected return are

1. Apositively related✓
2. Bnegatively related✓
3. Ccompletely unrelated✓
4. Dalways exactly equal✓

Historical (realized) returns are useful for

1. Aestimating expected returns and risk from past data✓
2. Bguaranteeing future returns✓
3. Celiminating risk✓
4. Dsetting the coupon rate✓

The wider the range of possible outcomes for an investment, the

1. Alower its risk✓
2. Bhigher its guaranteed return✓
3. Clower its expected return✓
4. Dgreater its risk✓

The required rate of return is the minimum return an investor

1. Aalways receives✓
2. Bdemands to justify an investment given its risk✓
3. Cpays in tax✓
4. Dearns risk-free✓

Nominal return differs from real return because nominal return does not adjust for

1. Ataxes✓
2. Bfees✓
3. Cbeta✓
4. Dinflation✓

Downside risk measures focus specifically on

1. Atotal variability✓
2. Bthe risk of returns falling below a target✓
3. Cupside potential✓
4. Dthe mean return✓

A treasury bill is generally considered to have

1. Ahigh default risk✓
2. Bhigh price volatility✓
3. Cnegligible default risk✓
4. Dhigh currency risk in its home country✓

If the actual return exceeds the required return, the investment has

1. Anegative alpha✓
2. Bhigh default risk✓
3. Cgenerated a positive abnormal return (alpha)✓
4. Dzero risk✓