Estimating Total

Risk I

[Questions]

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 1. A broadly consistent definition of ‘risk’ is that it is...
a. The definitive probability of the price of stocks decreasing.
b. The likelihood or value of losing money from an investment.
c. The date at which the price of a stock is expected to be
equal to zero.
d. The amount of time it takes for the price of a stock to
decrease by 50% or more.
e. The probability of the stock price decreasing by 85% or
more.

2. Generally speaking, all stocks are impacted by which 2 types of

risk?
a. Inflation and deflation only.
b. Recessions and depressions only.
c. Firm specific risk and market risk only.
d. Idiosyncratic risk and diversifiable risk only.
e. Systematic risk and non-diversifiable risk only.

3. A generally accepted measure of the total risk of a stock is its

volatility (i.e., its standard deviation).
a. True
b. False

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 4. The definition of volatility being akin to risk works on the premise
that:
a. Risk increases as the disparity between the return on a
stock (𝑟𝑗 ), and the expected return on the same stock (𝐸[𝑟𝑗 ])
increases.
b. Risk decreases as the disparity between the return on a
stock (𝑟𝑗 ), and the expected return on the same stock (𝐸[𝑟𝑗 ])
increases.
c. Risk increases as the disparity between the return on a
stock (𝑟𝑗 ), and the expected return on the same stock (𝐸[𝑟𝑗 ])
decreases.
d. Risk is completely independent from the difference between
the return on a stock (𝑟𝑗 ), and the expected return on the
same stock (𝐸[𝑟𝑗 ]).
e. None of the above.

5. For any given stock, adding the deviations (𝑟𝑗 – 𝐸[𝑟𝑗 ]) for n
observations, with 𝐸[𝑟𝑗 ] computed using the mean or average
method, the sum of the deviations ∑𝑛𝑖=1(𝑟𝑗 – 𝐸[𝑟𝑗 ]) will always be:
f. Greater than any given individual deviation (𝑟𝑗 – 𝐸[𝑟𝑗 ]).
g. Smaller than any given individual deviation (𝑟𝑗 – 𝐸[𝑟𝑗 ]).
h. Between zero and the highest deviation: max[(𝑟𝑗 – 𝐸[𝑟𝑗 ])].
i. Between the lowest deviation: min[(𝑟𝑗 – 𝐸[𝑟𝑗 ])] and zero.
j. Equal to zero.

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 6. For any given stock, adding the deviations (𝑟𝑗 – 𝐸[𝑟𝑗 ]) for n
observations, with 𝐸[𝑟𝑗 ] computed using the mean or average
method, the sum of the deviations ∑𝑛𝑖=1(𝑟𝑗 – 𝐸[𝑟𝑗 ]) will always be
equal to zero because:
k. It’s the nature of stock prices and returns.
l. Positive deviations cancel off negative deviations.
m. It follows the Law of One Price.
n. Any other value would imply an arbitrage opportunity.
o. A value smaller than zero would imply it is risk-free even
though it is not.

7. Squaring each individual deviation and summing them all up gives

us the:
p. Mean
q. Variance
r. Standard deviation
s. Sum of squared deviations
t. Sum of deviations

8. Squared deviations ensure that volatility is always expressed as

between minus infinity and zero.
u. True
v. False

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 9. The sum of squared deviations is divided by n – 1 instead of n
because n – 1 is the unbiased estimator of the population.
w. True
x. False

10. The standard deviation is a generally accepted measure of total

risk, measured as:
1
y. 𝜎𝑗 = √𝑛 ∑𝑛𝑖=1 𝑟𝑗

1
z. 𝜎𝑗 = √𝑛−1 ∑𝑛𝑖=1 𝑟𝑗

1
aa. 𝜎𝑗 = √𝑛−1 ∑𝑛𝑖=1(𝑟𝑗 − 𝐸[𝑟𝑗 ])2

1
bb. 𝜎𝑗 = √𝑛−1 ∑𝑛𝑖=1(𝑟𝑗 − 𝐸[𝑟𝑗 ])

cc. 𝜎𝑗 = √∑𝑛𝑖=1(𝑟𝑗 − 𝐸[𝑟𝑗 ])

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