Risk and Return MCQ Questions and Answers for Practice

1. What is the definition of risk in finance?

1. Possibility of loss
2. Ability to generate return
3. Both A and B
4. Uncertainty of future returns

2. In the Capital Market Line (CML), the slope represents:

1. Market risk
2. Risk-free rate
3. Sharpe ratio
4. Market return

3. Which of the following is an example of unsystematic risk?

1. Market crash
2. Inflation rate change
3. Labor strike at a company
4. Exchange rate fluctuation

4. The expected return of an asset is:

1. Always equal to the risk-free rate
2. The weighted average of possible returns
3. The highest return on the market
4. The actual return

5. Which of the following is true about diversification?

1. It eliminates systematic risk
2. It only reduces total risk
3. It eliminates all types of risk
4. It can reduce unsystematic risk

6. The risk premium is:

1. The return on a risk-free asset
2. The return on an average asset
3. The return over and above the risk-free rate
4. The risk of the portfolio

7. Which of the following is NOT an assumption of the CAPM?

1. Investors are rational
2. There are no taxes
3. Capital markets are perfect
4. Risk is non-existent

8. What is the main advantage of a well-diversified portfolio?

1. It increases returns
2. It eliminates unsystematic risk
3. It guarantees a risk-free return
4. It offers the highest return

9. A stock with a beta of 1 means:

1. It is less volatile than the market
2. It has no volatility
3. It is more volatile than the market
4. Its returns move in sync with the market

10. The Efficient Frontier represents:

1. A line of portfolios with minimum risk
2. A curve of portfolios offering the best trade-off between risk and return
3. The market portfolio
4. The risk-free portfolio

11. The concept of "systematic risk" is:

1. Risk that can be avoided through diversification
2. Risk due to company-specific factors
3. Risk affecting the whole market
4. Risk that cannot be diversified

12. What is the relationship between risk and return?

1. No relationship
2. Positive relationship
3. Negative relationship
4. Uncertain relationship

13. Which of the following is NOT a factor that affects systematic risk?

1. Interest rates
2. Market liquidity
3. Inflation rate
4. Natural disasters

14. The Capital Asset Pricing Model (CAPM) assumes that investors are:

1. Risk-averse
2. Risk-neutral
3. Risk-loving
4. Risk-seeking

15. In the CAPM, the market portfolio consists of:

1. All risky assets in the economy
2. A few selected stocks
3. Only government securities
4. Only stocks with the highest returns