Question 1

If two events are positively correlated but NOT perfectly correlated, then

Accepted Answer

A) diversification is not necessary since there is no risk. 
B) diversification eliminates all risk. 
C) diversification does not reduce risk at all. 
D) diversification can reduce risk. 
A) diversification is not necessary since there is no risk. 
B) diversification eliminates all risk. 
C) diversification does not reduce risk at all. 
D) diversification can reduce risk.

Question 2

The ability of diversification to reduce risk

Accepted Answer

A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is. 
A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is.

Question 3

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob's expected wealth is

Accepted Answer

A) $0. 
B) $50. 
C) $75. 
D) $100. 
A) $0. 
B) $50. 
C) $75. 
D) $100.

Question 4

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Accepted Answer

A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth. 
A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.

Question 5

Variance is a measure of ________ and the higher the variance, ________.

Accepted Answer

A) expected profit; the greater the profit 
B) risk; the greater the risk 
C) standard deviation; greater the standard deviation 
D) risk; the lower the risk 
A) expected profit; the greater the profit 
B) risk; the greater the risk 
C) standard deviation; greater the standard deviation 
D) risk; the lower the risk

Question 6

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Accepted Answer

A) True 
 B)False

Question 7

Someone who is risk-averse has

Accepted Answer

A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-neutral. 
A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-neutral.

Question 8

Someone who is risk neutral has

Accepted Answer

A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-preferring. 
A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-preferring.

Question 9

If two events are perfectly negatively correlated, then

Accepted Answer

A) diversification can reduce but not eliminate risk. 
B) diversification can eliminate risk. 
C) diversification has no impact on risk. 
D) diversification cuts risk in half. 
A) diversification can reduce but not eliminate risk. 
B) diversification can eliminate risk. 
C) diversification has no impact on risk. 
D) diversification cuts risk in half.

Question 10

On any given day we know a salesman can earn $0 with a 30% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

Accepted Answer

A) $0. 
B) $140. 
C) $300. 
D) It cannot be determined from the available information. 
A) $0. 
B) $140. 
C) $300. 
D) It cannot be determined from the available information.

Question 11

If Stock A increases in value when Stock B decreases in value at the same time, they are

Accepted Answer

A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) in different industries. 
A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) in different industries.

Question 12

Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Equivalently, she could get utility of 146 from a certainty equivalent of $43. What is Natasha's risk premium?

Accepted Answer

A) $19 
B) $43 
C) $103 
D) $105 
A) $19 
B) $43 
C) $103 
D) $105

Question 13

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Accepted Answer

A) $30 
B) $50 
C) $70 
D) $75 
A) $30 
B) $50 
C) $70 
D) $75

Question 14

One aspect of prospect theory is that people tend to

Accepted Answer

A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses. 
A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses.

Question 15

Best guesses of an event occurring in the future are based on

Accepted Answer

A) estimates derived from the frequency of the event occurring in the past. 
B) coin flips. 
C) subjective probability. 
D) the wisdom of crowds. 
A) estimates derived from the frequency of the event occurring in the past. 
B) coin flips. 
C) subjective probability. 
D) the wisdom of crowds.

Question 16

If fair insurance is offered to a risk-averse person, she will

Accepted Answer

A) buy enough insurance to eliminate all risk. 
B) not buy any insurance because it is overpriced. 
C) not buy any insurance since the marginal utility of the amount of the payment is positive. 
D) buy enough insurance to cover about half of the possible loss. 
A) buy enough insurance to eliminate all risk. 
B) not buy any insurance because it is overpriced. 
C) not buy any insurance since the marginal utility of the amount of the payment is positive. 
D) buy enough insurance to cover about half of the possible loss.

If two events are positively correlated but NOT perfectly correlated, then

The ability of diversification to reduce risk

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob's expected wealth is

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Variance is a measure of and the higher the variance, .

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Someone who is risk-averse has

Someone who is risk neutral has

If two events are perfectly negatively correlated, then

On any given day we know a salesman can earn $0 with a 30% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

If Stock A increases in value when Stock B decreases in value at the same time, they are

Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Equivalently, she could get utility of 146 from a certainty equivalent of $43. What is Natasha's risk premium?

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

One aspect of prospect theory is that people tend to

Best guesses of an event occurring in the future are based on

If fair insurance is offered to a risk-averse person, she will

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Exam 14: Managerial Decision-Making Under Uncertainty

If two events are positively correlated but NOT perfectly correlated, then

The ability of diversification to reduce risk

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob's expected wealth is

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Variance is a measure of ________ and the higher the variance, ________.

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Someone who is risk-averse has

Someone who is risk neutral has

If two events are perfectly negatively correlated, then

On any given day we know a salesman can earn $0 with a 30% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

If Stock A increases in value when Stock B decreases in value at the same time, they are

Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Equivalently, she could get utility of 146 from a certainty equivalent of $43. What is Natasha's risk premium?

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

One aspect of prospect theory is that people tend to

Best guesses of an event occurring in the future are based on

If fair insurance is offered to a risk-averse person, she will

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Variance is a measure of and the higher the variance, .