Risk and Return MCQs 2026

Systematic risk is caused by factors such as

1. A a single firm's management decisions ✓
2. B one product recall ✓
3. C economy-wide events like interest rates, inflation and recessions ✓
4. D a company lawsuit ✓

Beta of a security measures its

1. A total risk ✓
2. B dividend growth ✓
3. C systematic risk relative to the market ✓
4. D liquidity ✓

Non-diversifiable risk is also called

1. A specific risk ✓
2. B systematic (market) risk ✓
3. C business risk only ✓
4. D firm-specific risk ✓

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

1. A market risk premium ✓
2. B inflation rate ✓
3. C coupon rate ✓
4. D dividend yield ✓

Diversifiable risk is also called

1. A market risk ✓
2. B systematic risk ✓
3. C interest-rate risk ✓
4. D unsystematic (specific) risk ✓

The risk-free rate of return is typically proxied by

1. A corporate bond yields ✓
2. B equity market returns ✓
3. C short-term government treasury bill yields ✓
4. D real estate returns ✓

The risk premium is the

1. A extra return demanded above the risk-free rate for taking on risk ✓
2. B risk-free rate itself ✓
3. C inflation rate ✓
4. D tax rate ✓

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

1. A inflation rate ✓
2. B tax rate ✓
3. C risk-free rate ✓
4. D beta ✓

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

1. A higher risk ✓
2. B unknown risk ✓
3. C higher fees ✓
4. D lower risk ✓

The risk-return trade-off principle states that

1. A higher risk always means lower return ✓
2. B higher expected return generally requires accepting higher risk ✓
3. C risk and return are unrelated ✓
4. D low risk always gives high return ✓

The coefficient of variation is useful because it measures

1. A total return ✓
2. B risk per unit of return, allowing comparison of investments ✓
3. C beta ✓
4. D the dividend yield ✓

Variance and standard deviation measure the

1. A average return ✓
2. B risk-free rate ✓
3. C beta ✓
4. D dispersion of returns around the mean ✓

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

1. A standard deviation of returns ✓
2. B mean return ✓
3. C median return ✓
4. D modal return ✓

Interest-rate risk is the danger that

1. A a firm defaults on its debt ✓
2. B currency values change ✓
3. C changing interest rates reduce an investment's value, especially bonds ✓
4. D inflation disappears ✓

In finance, risk is generally defined as

1. A a certain loss ✓
2. B a guaranteed gain ✓
3. C the uncertainty or variability of returns ✓
4. D the tax rate ✓

Default (credit) risk refers to the possibility that

1. A interest rates rise ✓
2. B the whole market crashes ✓
3. C the currency devalues ✓
4. D a borrower fails to make promised payments ✓

Liquidity risk is the risk that

1. A prices always rise ✓
2. B an asset cannot be sold quickly without a significant price concession ✓
3. C dividends are cut ✓
4. D inflation rises sharply ✓

Expected return is best described as

1. A the highest possible return ✓
2. B a guaranteed return ✓
3. C last year's return ✓
4. D the probability-weighted average of possible returns ✓

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

1. A the ending value ✓
2. B the beginning value ✓
3. C the average value ✓
4. D the income received ✓

The total return on a stock consists of

1. A dividends only ✓
2. B capital gain only ✓
3. C dividend income plus capital gain or loss ✓
4. D interest only ✓

Inflation (purchasing-power) risk is the danger that

1. A nominal returns fall to zero ✓
2. B the firm defaults ✓
3. C rising prices erode the real value of returns ✓
4. D the stock splits ✓

Exchange-rate risk mainly affects

1. A purely domestic investments ✓
2. B investments with foreign-currency cash flows ✓
3. C treasury bills ✓
4. D cash held at home ✓

Business risk arises from

1. A the variability of a firm's operating income ✓
2. B the use of debt only ✓
3. C exchange rates only ✓
4. D inflation only ✓

Financial risk arises specifically from a firm's use of

1. A equity only ✓
2. B cash reserves ✓
3. C inventory ✓
4. D debt (financial leverage) ✓

In finance, the term return refers to

1. A the gain or loss on an investment over a period ✓
2. B the initial cost only ✓
3. C the tax paid on the investment ✓
4. D the broker's commission ✓

A probability distribution of returns that is more spread out indicates

1. A lower risk ✓
2. B higher risk ✓
3. C zero risk ✓
4. D a guaranteed return ✓

The arithmetic mean return tends to be

1. A higher than or equal to the geometric mean return ✓
2. B always lower than the geometric mean ✓
3. C unrelated to the geometric mean ✓
4. D always exactly equal to the geometric mean ✓

The geometric mean return is preferred for measuring

1. A a single period return ✓
2. B expected future return ✓
3. C the compound rate of growth over multiple periods ✓
4. D the risk-free rate ✓

Capital gain yield is the

1. A dividend divided by price ✓
2. B coupon divided by par ✓
3. C total return ✓
4. D percentage 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. A the second one ✓
2. B neither ✓
3. C both equally ✓
4. D the first (lower standard deviation) ✓

Standard deviation is expressed in the

1. A same units as the returns (percentage) ✓
2. B units of beta ✓
3. C units of time ✓
4. D currency of the country only ✓

Adding more uncorrelated assets to a portfolio primarily reduces

1. A unsystematic risk ✓
2. B systematic risk ✓
3. C the expected return ✓
4. D the risk-free rate ✓

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

1. A risk-neutral ✓
2. B risk-averse ✓
3. C risk-seeking ✓
4. D indifferent ✓

A risk-neutral investor makes decisions based solely on

1. A risk ✓
2. B standard deviation ✓
3. C beta ✓
4. D expected return, ignoring risk ✓

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

1. A beta only ✓
2. B mean only ✓
3. C coefficient of variation ✓
4. D mode ✓

The Security Market Line expresses the relationship between required return and

1. A standard deviation ✓
2. B beta ✓
3. C time ✓
4. D dividends ✓

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

1. A lose money ✓
2. B gain money ✓
3. C break even always ✓
4. D earn the risk-free rate ✓

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

1. A positively related ✓
2. B negatively related ✓
3. C completely unrelated ✓
4. D always exactly equal ✓

Historical (realized) returns are useful for

1. A estimating expected returns and risk from past data ✓
2. B guaranteeing future returns ✓
3. C eliminating risk ✓
4. D setting the coupon rate ✓

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

1. A lower its risk ✓
2. B higher its guaranteed return ✓
3. C lower its expected return ✓
4. D greater its risk ✓

The required rate of return is the minimum return an investor

1. A always receives ✓
2. B demands to justify an investment given its risk ✓
3. C pays in tax ✓
4. D earns risk-free ✓

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

1. A taxes ✓
2. B fees ✓
3. C beta ✓
4. D inflation ✓

Downside risk measures focus specifically on

1. A total variability ✓
2. B the risk of returns falling below a target ✓
3. C upside potential ✓
4. D the mean return ✓

A treasury bill is generally considered to have

1. A high default risk ✓
2. B high price volatility ✓
3. C negligible default risk ✓
4. D high currency risk in its home country ✓

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

1. A negative alpha ✓
2. B high default risk ✓
3. C generated a positive abnormal return (alpha) ✓
4. D zero risk ✓