Question 1

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 2

Use the following statements to answer this question: I.The real rate of return on an investment is the nominal return minus the rate of inflation.
II.The real rate of return on an investment cannot be negative.

Accepted Answer

A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false. 
A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false.

Question 3

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 4

Jonathan and Roberto enjoy playing poker.Jonathan's utility as a function of winning a poker hand is   Roberto's utility as a function of winning a poker hand is   Unfortunately for Jonathan,he has a habit of whistling only when he gets a full-house or better.Roberto,however,has not noticed this habit.Roberto currently has three-of-a-kind (which will lose to a full-house or better).Roberto believes that the probability Jonathan can beat his three-of-a-kind is 1/10.Roberto could choose to fold or play the hand.Calculate Roberto's expected utility according to his beliefs.Jonathan is currently whistling.How much could Roberto increase his utility by recognizing Jonathan's whistling habit?

Accepted Answer

According to Roberto's beliefs,his expec

Question 5

Consider the following statements when answering this question; I.Without fire insurance,the expected value of homeownership for a risk averse homeowner is $W.Insurance companies are willing to sell this homeowner a policy that guarantees the homeowner a wealth of $W.
II.In a neighborhood where the price of houses are identical,the probability of a fire is identical,and the value of damage done by fires is identical,the risk premium for an insurance policy that repays all the cost of the fire damage does not vary across homeowners.

Accepted Answer

A) I and I are true. 
B) I is true,and II is false. 
C) I is false,and II is true. 
D) I and II are false. 
A) I and I are true. 
B) I is true,and II is false. 
C) I is false,and II is true. 
D) I and II are false.

Question 6

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face,but you could buy information that reduces the degree of uncertainty.Based on the discussion in this chapter,the value of this partial information could be determined as the:

Accepted Answer

A) expected outcome under complete certainty minus the expected outcome under the partial information case. 
B) expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case. 
C) utility of the partially certain case minus the utility of the completely certain case. 
D) We cannot determine the value of information under partial certainty. 
A) expected outcome under complete certainty minus the expected outcome under the partial information case. 
B) expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case. 
C) utility of the partially certain case minus the utility of the completely certain case. 
D) We cannot determine the value of information under partial certainty.

Question 7

The expected value is a measure of

Accepted Answer

A) risk. 
B) variability. 
C) uncertainty. 
D) central tendency. 
A) risk. 
B) variability. 
C) uncertainty. 
D) central tendency.

Question 8

Figure 5.2
-When facing a 50% chance of receiving $50 and a 50% chance of receiving $100,the individual pictured in Figure 5.2

Accepted Answer

A) would pay a risk premium of 10 utils to avoid facing the two outcomes. 
B) would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes. 
C) would pay a risk premium of $7.50 to avoid facing the two outcomes. 
D) would want to be paid a risk premium of $7.50 to avoid facing the two outcomes. 
E) has a risk premium of 10 utils. 
A) would pay a risk premium of 10 utils to avoid facing the two outcomes. 
B) would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes. 
C) would pay a risk premium of $7.50 to avoid facing the two outcomes. 
D) would want to be paid a risk premium of $7.50 to avoid facing the two outcomes. 
E) has a risk premium of 10 utils.

Question 9

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 pay-off of outcome C?

Accepted Answer

A) -150 
B) 0 
C) 25 
D) 100 
E) 150 
A) -150 
B) 0 
C) 25 
D) 100 
E) 150

Question 10

Jack is near retirement and worried that if the stock market falls he will not be able to wait to take his funds out,and will have to sell at the bottom of the market.Richard thinks the probability of a stock market downturn is the same,but he is only 40 and could therefore wait for another turnaround.They face the same budget line.Jack's risk/return indifference curve

Accepted Answer

A) will be concave; Richard's will be convex. 
B) will be convex; Richard's will be concave. 
C) will be tangent to the budget line at a point to the left of Richard's. 
D) will be tangent to the budget line at a point to the right of Richard's. 
E) must still be tangent to the budget line at the same point as Richard's. 
A) will be concave; Richard's will be convex. 
B) will be convex; Richard's will be concave. 
C) will be tangent to the budget line at a point to the left of Richard's. 
D) will be tangent to the budget line at a point to the right of Richard's. 
E) must still be tangent to the budget line at the same point as Richard's.

Question 11

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.

Question 12

Which of the following statements is true?

Accepted Answer

A) The expected return and standard deviation of return are greater for common stock than for U.S.treasury bills. 
B) The expected return on common stocks is greater than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is less than the standard deviation of return for U.S.treasury bills 
C) The expected return on common stocks is less than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is greater than the standard deviation of return for U.S.treasury bills. 
D) The expected return and standard deviation of return are less for common stocks than for U.S.treasury bills. 
A) The expected return and standard deviation of return are greater for common stock than for U.S.treasury bills. 
B) The expected return on common stocks is greater than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is less than the standard deviation of return for U.S.treasury bills 
C) The expected return on common stocks is less than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is greater than the standard deviation of return for U.S.treasury bills. 
D) The expected return and standard deviation of return are less for common stocks than for U.S.treasury bills.

Question 13

One reason individuals are willing to pay for information in uncertain situations is that information

Accepted Answer

A) can reduce uncertainty. 
B) is a way to diversify. 
C) is a method of insurance. 
D) is a method of self-insurance. 
E) always reduces the difference between the probabilities of possible outcomes. 
A) can reduce uncertainty. 
B) is a way to diversify. 
C) is a method of insurance. 
D) is a method of self-insurance. 
E) always reduces the difference between the probabilities of possible outcomes.

Question 14

Some recent developments in financial research focus on ways to make portfolio allocations and other investment decisions in ways that largely ignore the possible gains but protect against large losses.These tools are designed to reflect __________ behavior among investors.

Accepted Answer

A) risk neutral 
B) substitution 
C) loss aversion 
D) anchoring 
A) risk neutral 
B) substitution 
C) loss aversion 
D) anchoring

Question 15

Which of the following actions may be explained by the law of small numbers?

Accepted Answer

A) People buy lottery tickets. 
B) People buy air travel insurance. 
C) People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances. 
D) all of the above 
A) People buy lottery tickets. 
B) People buy air travel insurance. 
C) People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances. 
D) all of the above

Question 16

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 expected utility of income from research is

Accepted Answer

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

Question 17

A risk-averse individual has

Accepted Answer

A) an increasing marginal utility of income. 
B) an increasing marginal utility of risk. 
C) a diminishing marginal utility of income. 
D) a diminishing marginal utility of risk. 
E) a constant marginal utility of income,but a diminishing marginal utility of risk. 
A) an increasing marginal utility of income. 
B) an increasing marginal utility of risk. 
C) a diminishing marginal utility of income. 
D) a diminishing marginal utility of risk. 
E) a constant marginal utility of income,but a diminishing marginal utility of risk.

Question 18

Joan Summers has $100,000 to invest and is considering two alternatives.She can buy a risk free asset that will pay 10% or she can invest in a stock that has a 0.4 chance of paying 15%,a 0.3 chance of paying 18%,and a 0.3 chance of providing a 6% return.Joan plans to invest $70,000 in the stock and $30,000 in the risk free asset.
a.Determine the expected percentage return on the stock and the standard deviation.
b.Calculate the weighted average return on the portfolio,given the planned investment strategy outlined above.
c.Determine the standard deviation for the portfolio.
d.Write the equation that represents the budget line in the risk-return tradeoff.What is the slope of the budget line? Interpret this slope.

Accepted Answer

a. Expected return on stock: 0.4(15)+ 0.

Question 19

Bill's utility function takes the form U(I)= exp(I)where I is Bill's income.Based on this utility function,we can see that Bill is:

Accepted Answer

A) risk averse 
B) risk neutral 
C) risk loving 
D) He can exhibit two or more of these risk behaviors under this utility function. 
A) risk averse 
B) risk neutral 
C) risk loving 
D) He can exhibit two or more of these risk behaviors under this utility function.

Question 20

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1  
-Refer to Table 5.1.A risk-averse student making a decision solely on the basis of the above information

Accepted Answer

A) would definitely become a math major. 
B) would definitely not become an English major. 
C) would definitely become a political science major. 
D) might be either a mathematics major or English major,depending upon the utility of the average offer. 
E) would definitely be indifferent between the accounting major and the English major if the probability of finding a job in accounting were any value higher than 0.95. 
A) would definitely become a math major. 
B) would definitely not become an English major. 
C) would definitely become a political science major. 
D) might be either a mathematics major or English major,depending upon the utility of the average offer. 
E) would definitely be indifferent between the accounting major and the English major if the probability of finding a job in accounting were any value higher than 0.95.

Which of the following assets is almost riskless?

Use the following statements to answer this question: I.The real rate of return on an investment is the nominal return minus the rate of inflation. II.The real rate of return on an investment cannot be negative.

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

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face,but you could buy information that reduces the degree of uncertainty.Based on the discussion in this chapter,the value of this partial information could be determined as the:

The expected value is a measure of

Figure 5.2 -When facing a 50% chance of receiving $50 and a 50% chance of receiving $100,the individual pictured in Figure 5.2

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

Which of the following statements is true?

One reason individuals are willing to pay for information in uncertain situations is that information

Some recent developments in financial research focus on ways to make portfolio allocations and other investment decisions in ways that largely ignore the possible gains but protect against large losses.These tools are designed to reflect __________ behavior among investors.

Which of the following actions may be explained by the law of small numbers?

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 expected utility of income from research is

A risk-averse individual has

Bill's utility function takes the form U(I)= exp(I)where I is Bill's income.Based on this utility function,we can see that Bill is:

Consider the following information about job opportunities for new college graduates in Megalopolis: Table 5.1 -Refer to Table 5.1.A risk-averse student making a decision solely on the basis of the above information

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

Which of the following assets is almost riskless?

Use the following statements to answer this question: I.The real rate of return on an investment is the nominal return minus the rate of inflation. II.The real rate of return on an investment cannot be negative.

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

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face,but you could buy information that reduces the degree of uncertainty.Based on the discussion in this chapter,the value of this partial information could be determined as the:

The expected value is a measure of

Figure 5.2 -When facing a 50% chance of receiving $50 and a 50% chance of receiving $100,the individual pictured in Figure 5.2

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

Which of the following statements is true?

One reason individuals are willing to pay for information in uncertain situations is that information

Some recent developments in financial research focus on ways to make portfolio allocations and other investment decisions in ways that largely ignore the possible gains but protect against large losses.These tools are designed to reflect __________ behavior among investors.

Which of the following actions may be explained by the law of small numbers?

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 expected utility of income from research is

A risk-averse individual has

Bill's utility function takes the form U(I)= exp(I)where I is Bill's income.Based on this utility function,we can see that Bill is:

Consider the following information about job opportunities for new college graduates in Megalopolis: Table 5.1 -Refer to Table 5.1.A risk-averse student making a decision solely on the basis of the above information

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