Question 1

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset)is equal to

Accepted Answer

A) the fraction invested in the risky asset times the standard deviation of the non-risky asset. 
B) the fraction invested in the non-risky asset times the standard deviation of the risky asset. 
C) the fraction invested in the risky asset times the standard deviation of that asset. 
D) the fraction invested in the non-risky asset times the standard deviation of that asset. 
A) the fraction invested in the risky asset times the standard deviation of the non-risky asset. 
B) the fraction invested in the non-risky asset times the standard deviation of the risky asset. 
C) the fraction invested in the risky asset times the standard deviation of that asset. 
D) the fraction invested in the non-risky asset times the standard deviation of that asset.

Question 2

Any risk-averse individual would always

Accepted Answer

A) take a 10% chance at $100 rather than a sure $10. 
B) take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1. 
C) take a sure $10 rather than a 10% chance at $100. 
D) take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1. 
E) do C or D above. 
A) take a 10% chance at $100 rather than a sure $10. 
B) take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1. 
C) take a sure $10 rather than a 10% chance at $100. 
D) take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1. 
E) do C or D above.

Question 3

Which of these is NOT a generally accepted means of reducing risk?

Accepted Answer

A) Diversification 
B) Insurance 
C) Obtaining more information 
D) none of the above 
A) Diversification 
B) Insurance 
C) Obtaining more information 
D) none of the above

Question 4

To demonstrate the anchoring phenomenon,Kahneman and Tversky would ask research subjects very difficult questions that should be answered with a number between zero and 100.Before asking for the respondent's answer,they would also spin a large wheel that generated random number outcomes from zero to 100.If the respondents were subject to the anchoring effect,then we should expect that:

Accepted Answer

A) their responses are uncorrelated with the numbers generated by the wheel. 
B) their responses are correlated with the numbers generated by the wheel. 
C) their responses are wrong most of the time. 
D) none of the above 
A) their responses are uncorrelated with the numbers generated by the wheel. 
B) their responses are correlated with the numbers generated by the wheel. 
C) their responses are wrong most of the time. 
D) none of the above

Question 5

John Brown's utility of income function is U = log(I+1),where I represents income.From this information you can say that

Accepted Answer

A) John Brown is risk neutral. 
B) John Brown is risk loving. 
C) John Brown is risk averse. 
D) We need more information before we can determine John Brown's preference for risk. 
A) John Brown is risk neutral. 
B) John Brown is risk loving. 
C) John Brown is risk averse. 
D) We need more information before we can determine John Brown's preference for risk.

Question 6

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  
-In Table 5.3,the standard deviation is

Accepted Answer

A) highest for the HMO choice,and it is $76,000. 
B) lowest for the HMO choice. 
C) higher for owning one's own practice than for going into research. 
D) higher for the HMO choice than for going into research. 
A) highest for the HMO choice,and it is $76,000. 
B) lowest for the HMO choice. 
C) higher for owning one's own practice than for going into research. 
D) higher for the HMO choice than for going into research.

Question 7

Smith just bought a house for $250,000.Earthquake insurance,which would pay $250,000 in the event of a major earthquake,is available for $25,000.Smith estimates that the probability of a major earthquake in the coming year is 10 percent,and that in the event of such a quake,the property would be worth nothing.The utility (U)that Smith gets from income (I)is given as follows: U(I)= I0.5.
Should Smith buy the insurance?

Accepted Answer

A) Yes. 
B) No. 
C) Smith is indifferent. 
D) We need more information on Smith's attitude toward risk. 
A) Yes. 
B) No. 
C) Smith is indifferent. 
D) We need more information on Smith's attitude toward risk.

Question 8

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation)is usually

Accepted Answer

A) positive. 
B) strictly linear. 
C) flat. 
D) negative. 
E) chaotic. 
A) positive. 
B) strictly linear. 
C) flat. 
D) negative. 
E) chaotic.

Question 9

United Plastics Company produces large plastic cups in a variety of colors.United can produce plain plastic cups that are sold in department stores in inexpensive ten cup bundles.Alternatively,United can sell Novelty Cups which are imprinted with slogans and designs.The printed cups cost more to produce,but they sell for a higher price.The appropriate strategy for United depends upon the state of the economy.Plain cups do better during a recession,while Novelty Cups earn higher profits during normal economic conditions.During a recession,United will earn a $100,000 profit selling plain cups and $40,000 with the Novelty line.Under normal economic conditions,United will earn $120,000 with the plain cups and a $200,000 profit with Novelty Cups.United currently does not use economic forecasts and simply assigns equal probabilities to a recession and normal conditions.
a.Using the probabilities assumed by United,what is the expected value of each alternative? Which alternative should the firm pursue? (Your recommendation should include separate recommendations for alternative attitudes toward risk.)
b.Calculate and interpret the value to the firm of complete information.

Accepted Answer

a. E.V.Plain Cups = 0.5(100,000)+ 0.5(12

Question 10

John Smith is considering the purchase of a used car that has a bank book value of $16,000.He believes that there is a 20% chance that the car's transmission is damaged.If the transmission is damaged,the car would be worth only $12,000 to Smith.What is the expected value of the car to Smith?

Accepted Answer

Expected Value = E($)= Pr(X₁)+ (1 - Pr)(X

Question 11

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below:   The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the deviation of outcome A?

Accepted Answer

A) 30 
B) 50 
C) 75 
D) 100 
A) 30 
B) 50 
C) 75 
D) 100

Question 12

Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game.The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for __________ of the outcome when making decisions.

Accepted Answer

A) loss aversion 
B) fairness 
C) efficiency 
D) utility 
A) loss aversion 
B) fairness 
C) efficiency 
D) utility

Question 13

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 14

Figure 5.3
-The individual pictured in Figure 5.3

Accepted Answer

A) prefers a sure $6000 to a 50% chance of $4000 and a 50% chance of $8000. 
B) has an expected utility of 12 from a 50% chance of $4000 and a 50% chance of $8000. 
C) would receive a utility of 12 from a sure $6000. 
D) would receive a utility of 18 from a sure $6000. 
A) prefers a sure $6000 to a 50% chance of $4000 and a 50% chance of $8000. 
B) has an expected utility of 12 from a 50% chance of $4000 and a 50% chance of $8000. 
C) would receive a utility of 12 from a sure $6000. 
D) would receive a utility of 18 from a sure $6000.

Question 15

Scenario 5.3:
Wanting to invest in the computer games industry,you select Whizbo,Yowzo and Zowiebo as the three best firms.Over the past 10 years,the three firms have had good years and bad years.The following table shows their performance:  
-Refer to Scenario 5.3.Based on the 10 years' past performance,what is the probability of a good year for Zowiebo?

Accepted Answer

A) 30/31 
B) 1/31 
C) 0)9 
D) 0)1 
A) 30/31 
B) 1/31 
C) 0)9 
D) 0)1

Question 16

The demand curve for a particular stock at any point in time is

Accepted Answer

A) very inelastic but not infinitely so. 
B) almost infinitely inelastic. 
C) infinitely elastic. 
D) fairly elastic but not infinitely elastic. 
A) very inelastic but not infinitely so. 
B) almost infinitely inelastic. 
C) infinitely elastic. 
D) fairly elastic but not infinitely elastic.

Question 17

A new toll road was built in Southern California between San Juan Capistrano and Costa Mesa.On average,drivers save 10 minutes taking this road as opposed to the old road.The toll is $2; the fine for not paying the toll is $76.The probability of catching and fining someone who does not pay the toll is 90%.Individuals who take the road and pay the toll must therefore value 10 minutes at a minimum

Accepted Answer

A) between $1.80 and $68.40. 
B) between $2 and $68.40. 
C) $1.80. 
D) between $1.80 and $76. 
E) more than $76. 
A) between $1.80 and $68.40. 
B) between $2 and $68.40. 
C) $1.80. 
D) between $1.80 and $76. 
E) more than $76.

Question 18

Figure 5.2
-The individual pictured in Figure 5.2

Accepted Answer

A) prefers a 50% chance of $100 and a 50% chance of $50 to a sure $75. 
B) would receive a utility of 300 from a 50% chance of $100 and a 50% chance of $50. 
C) would receive a utility of 300 from a sure $75. 
D) would receive a utility of 250 from a sure $75. 
E) is one for whom income is a measure of well-being. 
A) prefers a 50% chance of $100 and a 50% chance of $50 to a sure $75. 
B) would receive a utility of 300 from a 50% chance of $100 and a 50% chance of $50. 
C) would receive a utility of 300 from a sure $75. 
D) would receive a utility of 250 from a sure $75. 
E) is one for whom income is a measure of well-being.

Question 19

Tom Wilson is the operations manager for BiCorp,a real estate investment firm.Tom must decide if BiCorp is to invest in a strip mall in a northeast metropolitan area.If the shopping center is highly successful,after tax profits will be $100,000 per year.Moderate success would yield an annual profit of $50,000,while the project will lose $10,000 per year if it is unsuccessful.Past experience suggests that there is a 40% chance that the project will be highly successful,a 40% chance of moderate success,and a 20% probability that the project will be unsuccessful.
a.Calculate the expected value and standard deviation of profit.
b.The project requires an $800,000 investment.If BiCorp has an 8% opportunity cost on invested funds of similar riskiness,should the project be undertaken?

Accepted Answer

a. Expected Value @#IMG-DLM& ⁼ @#IMG-DLM& @#IMG-DLM& @#IMG-DLM& @#IMG-DLM& @#IMG-DLM& @#IMG-DLM& 100,000 .4 40,

Question 20

The indifference curves of two investors are plotted against a single budget line.Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

Accepted Answer

A) Investors A and B will hold the same portfolio. 
B) Investors A and B will have different portfolios of the same standard deviation. 
C) Investors A and B will have different portfolios of the same rate of return. 
D) Investors A and B will have different portfolios but have the same level of risk aversion. 
E) Investor A will expect to earn a lower rate of return than investor B. 
A) Investors A and B will hold the same portfolio. 
B) Investors A and B will have different portfolios of the same standard deviation. 
C) Investors A and B will have different portfolios of the same rate of return. 
D) Investors A and B will have different portfolios but have the same level of risk aversion. 
E) Investor A will expect to earn a lower rate of return than investor B.

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset)is equal to

Any risk-averse individual would always

Which of these is NOT a generally accepted means of reducing risk?

John Brown's utility of income function is U = log(I+1),where I represents income.From this information you can say that

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 -In Table 5.3,the standard deviation is

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation)is usually

John Smith is considering the purchase of a used car that has a bank book value of $16,000.He believes that there is a 20% chance that the car's transmission is damaged.If the transmission is damaged,the car would be worth only $12,000 to Smith.What is the expected value of the car to Smith?

Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game.The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for __________ of the outcome when making decisions.

The object of diversification is

Figure 5.3 -The individual pictured in Figure 5.3

The demand curve for a particular stock at any point in time is

Figure 5.2 -The individual pictured in Figure 5.2

The indifference curves of two investors are plotted against a single budget line.Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

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 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Exam 5: Uncertainty and Consumer Behavior

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset)is equal to

Any risk-averse individual would always

Which of these is NOT a generally accepted means of reducing risk?

John Brown's utility of income function is U = log(I+1),where I represents income.From this information you can say that

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 -In Table 5.3,the standard deviation is

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation)is usually

John Smith is considering the purchase of a used car that has a bank book value of $16,000.He believes that there is a 20% chance that the car's transmission is damaged.If the transmission is damaged,the car would be worth only $12,000 to Smith.What is the expected value of the car to Smith?

Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game.The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for __________ of the outcome when making decisions.

The object of diversification is

Figure 5.3 -The individual pictured in Figure 5.3

The demand curve for a particular stock at any point in time is

Figure 5.2 -The individual pictured in Figure 5.2

The indifference curves of two investors are plotted against a single budget line.Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

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 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters