1. Assuming that the average duration of its assets is 7 years, while the average duration of its liabilities is 4 years, then a 2 percentage point increase in interest rates will cause the net worth of First National Bank to (increase, decrease) by ________ percent of the total original asset value. (Hint: Net worth=Assets-Liabilities)
2. Which of the following statements is CORRECT?
A. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
B. Portfolio diversification reduces the variability of returns on an individual stock.
C. The smaller standard devaition is, the less likely that actual returns will be closer to expected returns, the lower the investment risk.
D. A stock with a beta of 1 is more risky than an average stock on the market.
E. A well-diversified investor will require to earn higher return on stocks with higher beta.