Question 1

We may not be able to fully remove risk by diversification if:

Accepted Answer

A)  a completely risk-free asset does not exist. 
B)  the asset returns in our portfolio are positively correlated. 
C)  buying stock on margin is not allowed by financial regulators. 
D)  none of the above 
A)  a completely risk-free asset does not exist. 
B)  the asset returns in our portfolio are positively correlated. 
C)  buying stock on margin is not allowed by financial regulators. 
D)  none of the above

Question 2

The indifference curve between expected return and the standard deviation of return for a risk-averse investor:

Accepted Answer

A)  is downward-sloping. 
B)  is upward-sloping. 
C)  is horizontal. 
D)  is vertical. 
E)  can take any shape. 
A)  is downward-sloping. 
B)  is upward-sloping. 
C)  is horizontal. 
D)  is vertical. 
E)  can take any shape.

Question 3

Sam's utility of wealth function is   Sam owns and operates a farm. He is concerned that a flood may wipe out his crops. If there is no flood, Sam's wealth is $360,000. The probability of a flood is 1/15. If a flood does occur, Sam's wealth will fall to $160,000. Calculate the risk premium Sam is willing to pay for flood insurance.

Accepted Answer

Sam's expected utility is @#IMG-DLM& = 400 + 8,400

Question 4

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3
  
-Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

Accepted Answer

A)  Work for HMO, open own practice, do research. 
B)  Work for HMO, do research, open own practice. 
C)  Do research, open own practice, work for HMO. 
D)  Do research, work for HMO, open own practice. 
E)  Open own practice, work for HMO, do research. 
A)  Work for HMO, open own practice, do research. 
B)  Work for HMO, do research, open own practice. 
C)  Do research, open own practice, work for HMO. 
D)  Do research, work for HMO, open own practice. 
E)  Open own practice, work for HMO, do research.

Question 5

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2. Which of the following is true?

Accepted Answer

A)  Randy has a higher expected expense than Samantha for the car. 
B)  Randy has a lower expected expense than Samantha for the car. 
C)  Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000. 
D)  Randy and Samantha have the same expected expense for the car: $20,000. 
E)  It is not possible to calculate the expected expense for the car until the true probabilities are known. 
A)  Randy has a higher expected expense than Samantha for the car. 
B)  Randy has a lower expected expense than Samantha for the car. 
C)  Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000. 
D)  Randy and Samantha have the same expected expense for the car: $20,000. 
E)  It is not possible to calculate the expected expense for the car until the true probabilities are known.

Question 6

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and remainder in Treasury bills, the standard deviation of her portfolio is:

Accepted Answer

A)  0 percent. 
B)  12 percent. 
C)  28 percent. 
D)  30 percent. 
E)  40 percent. 
A)  0 percent. 
B)  12 percent. 
C)  28 percent. 
D)  30 percent. 
E)  40 percent.

Question 7

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
  
-Refer to Scenario 5.6. The utility of expected income from research is:

Accepted Answer

A)  U($275,000). 
B)  U($95,000). 
C)  [U($500,000) + U($50,000)]/2. 
D)  .1U($500,000) + .9U($50,000). 
E)  dependent on which outcome actually occurs. 
A)  U($275,000). 
B)  U($95,000). 
C)  [U($500,000) + U($50,000)]/2. 
D)  .1U($500,000) + .9U($50,000). 
E)  dependent on which outcome actually occurs.

Question 8

Scenario 5.1:
Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000.
-Refer to Scenario 5.1. The expected value of the undertaking,

Accepted Answer

A)  according to Sarah, is $75,000. 
B)  according to Sarah, is $100,000. 
C)  according to Sarah, is $110,000. 
D)  according to Aline, is $200,000. 
E)  according to Aline, is $100,000. 
A)  according to Sarah, is $75,000. 
B)  according to Sarah, is $100,000. 
C)  according to Sarah, is $110,000. 
D)  according to Aline, is $200,000. 
E)  according to Aline, is $100,000.

Question 9

The object of diversification is:

Accepted Answer

A)  to reduce risk and fluctuations in income. 
B)  to reduce risk, but not to reduce fluctuations in income. 
C)  to reduce fluctuations in income, but not to reduce risk. 
D)  neither to reduce risk, nor to reduce fluctuations in income. 
A)  to reduce risk and fluctuations in income. 
B)  to reduce risk, but not to reduce fluctuations in income. 
C)  to reduce fluctuations in income, but not to reduce risk. 
D)  neither to reduce risk, nor to reduce fluctuations in income.

Question 10

Sandra lives in the Pacific Northwest and enjoys walking to and from work during sunny days. Her utility is sharply diminished if she must walk while it is raining. Sandra's utility function is   if she walks and there is no rain and   otherwise,   if she drives to work and   otherwise, and   if she walks and it rains and   otherwise. Sandra believes that the probability of rain today is 3/10. Given her beliefs, what is her expected utility from walking to work? What is her expected utility from driving to work according to her beliefs? If Sandra maximizes her expected utility according to her beliefs, will she drive or walk to work? Sandra missed the weather report this morning that stated the true probability of rain today is 4/5. Given the weather report is accurate, what is Sandra's true expected utility from walking and driving to work? How much could Sandra increase her expected utility if she read and believed the weather report?

Accepted Answer

Sandra's expected utility from walking a

Question 11

The slope of the budget line, faced by an investor deciding what percentage of her portfolio to place in a risky asset, increases when the:

Accepted Answer

A)  standard deviation of the portfolio gets smaller. 
B)  standard deviation of the risky asset gets larger. 
C)  rate of return on the risk-free asset gets larger. 
D)  rate of return on the risky asset gets larger. 
E)  rate of return on money gets larger. 
A)  standard deviation of the portfolio gets smaller. 
B)  standard deviation of the risky asset gets larger. 
C)  rate of return on the risk-free asset gets larger. 
D)  rate of return on the risky asset gets larger. 
E)  rate of return on money gets larger.

Question 12

Connie's utility depends upon her income. Her utility function is   She has received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $400. Otherwise she will receive $100.
a. What is the expected payoff from this prize? [Hint: The probability of rolling a 3 is 1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36.]
b. What is the expected utility from this prize?
c. Connie is offered an alternate prize of $169 (no dice roll is required). Will she accept the alternate prize or roll the dice?
d. What is the minimum payment that Connie will accept to forego the roll of the dice?

Accepted Answer

Expected return on stock:
a.The probabil

Question 13

The risk-return indifference curves for a risk-neutral investor are:

Accepted Answer

A)  vertical lines. 
B)  straight lines with slope equal to one. 
C)  horizontal lines. 
D)  upward sloping lines that are bowed downward. 
A)  vertical lines. 
B)  straight lines with slope equal to one. 
C)  horizontal lines. 
D)  upward sloping lines that are bowed downward.

Question 14

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Accepted Answer

A)  Standard deviation 
B)  Expected value 
C)  Variance 
D)  none of the above 
A)  Standard deviation 
B)  Expected value 
C)  Variance 
D)  none of the above

Question 15

The relationship between income and total utility for three investors (A, B, and
C) is shown in the tables below.
A B C
Income TU Income TU Income TU
5,000 14 5,000 4 5,000 6
10,000 24 10,000 8 10,000 14
15,000 32 15,000 12 15,000 24
20,000 38 20,000 16 20,000 36
25,000 43 25,000 20 25,000 52
30,000 47 30,000 24 30,000 72
35,000 49 35,000 28 35,000 100
Each investor has been confronted with the following three investment opportunities. The first opportunity is an investment which pays $15,000 risk free. Opportunity two offers a 0.4 probability of a $25,000 payment and a 0.6 probability of paying $10,000. The final investment will either pay $35,000 with a probability of 0.25 or $5,000 with a probability of 0.75. Determine the alternative each of the above investors would choose. Provide an intuitive explanation for the differences in their choices.

Accepted Answer

Investment 1 15,000 risk free
Investment

Question 16

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows
Larry:   (I) = 10   .
Judy:   (I) = 3   .
Carol:   (I) = 20I.

Accepted Answer

Larry's marginal utility of income is @#IMG-DLM& .

Question 17

Which of the following assets is almost riskless?

Accepted Answer

A)  Common stocks 
B)  Long-term corporate bonds 
C)  U.S. Treasury bills 
D)  Long-term government bonds 
E)  Apartment buildings 
A)  Common stocks 
B)  Long-term corporate bonds 
C)  U.S. Treasury bills 
D)  Long-term government bonds 
E)  Apartment buildings

Question 18

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a:

Accepted Answer

A)  dividend yield of 9%. 
B)  dividend yield of 20%. 
C)  dividend yield of 11%. 
D)  total return of 20%. 
E)  total return of 22%. 
A)  dividend yield of 9%. 
B)  dividend yield of 20%. 
C)  dividend yield of 11%. 
D)  total return of 20%. 
E)  total return of 22%.

Question 19

This year, on advice from your sister, you bought tobacco company stock at $50/share. During the year, you collected an $8 dividend, but due to the company's losses in medical lawsuits its stock fell to $40/share. At this point, you sell, realizing a:

Accepted Answer

A)  dividend yield of -16% and a capital loss of 20%. 
B)  dividend yield of 16% and a capital loss of 20%. 
C)  dividend loss 10%. 
D)  capital loss of 10%. 
E)  total loss of 20%. 
A)  dividend yield of -16% and a capital loss of 20%. 
B)  dividend yield of 16% and a capital loss of 20%. 
C)  dividend loss 10%. 
D)  capital loss of 10%. 
E)  total loss of 20%.

Question 20

In the figure below, what is true about the two jobs?

Accepted Answer

A)  Job 1 has a lower standard deviation than Job 2. 
B)  All outcomes in both jobs have the same probability of occurrence. 
C)  A risk-averse person would prefer Job 2. 
D)  A risk-neutral person would prefer Job 1. 
E)  Job 1 has a higher expected income than Job 2. 
A)  Job 1 has a lower standard deviation than Job 2. 
B)  All outcomes in both jobs have the same probability of occurrence. 
C)  A risk-averse person would prefer Job 2. 
D)  A risk-neutral person would prefer Job 1. 
E)  Job 1 has a higher expected income than Job 2.

We may not be able to fully remove risk by diversification if:

The indifference curve between expected return and the standard deviation of return for a risk-averse investor:

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. -Refer to Scenario 5.2. Which of the following is true?

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The utility of expected income from research is:

The object of diversification is:

The slope of the budget line, faced by an investor deciding what percentage of her portfolio to place in a risky asset, increases when the:

The risk-return indifference curves for a risk-neutral investor are:

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: (I) = 10 . Judy: (I) = 3 . Carol: (I) = 20I.

Which of the following assets is almost riskless?

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a:

This year, on advice from your sister, you bought tobacco company stock at $50/share. During the year, you collected an $8 dividend, but due to the company's losses in medical lawsuits its stock fell to $40/share. At this point, you sell, realizing a:

In the figure below, what is true about the two jobs?

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

Exam 5: Uncertainty and Consumer Behavior

We may not be able to fully remove risk by diversification if:

The indifference curve between expected return and the standard deviation of return for a risk-averse investor:

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. -Refer to Scenario 5.2. Which of the following is true?

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The utility of expected income from research is:

The object of diversification is:

The slope of the budget line, faced by an investor deciding what percentage of her portfolio to place in a risky asset, increases when the:

The risk-return indifference curves for a risk-neutral investor are:

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: (I) = 10 . Judy: (I) = 3 . Carol: (I) = 20I.

Which of the following assets is almost riskless?

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a:

This year, on advice from your sister, you bought tobacco company stock at $50/share. During the year, you collected an $8 dividend, but due to the company's losses in medical lawsuits its stock fell to $40/share. At this point, you sell, realizing a:

In the figure below, what is true about the two jobs?

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters