Question 1

If the market interest rate is 10 percent and a decision maker's risk-adjusted discount rate is 12 percent, then the decision maker

Accepted Answer

A)  is risk averse. 
B)  has a certainty-equivalent coefficient that is greater than one. 
C)  is risk neutral. 
D)  None of the above is correct. 
A)  is risk averse. 
B)  has a certainty-equivalent coefficient that is greater than one. 
C)  is risk neutral. 
D)  None of the above is correct. A

Question 2

The riskier a project is, the smaller its certainty equivalent will be.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following would suggest a decline in the level of risk in the U.S. financial markets

Accepted Answer

A)  A rise in VIX 
B)  An increase in the interest rate spread between a AAA corporate bond and an equivalent in maturity U.S. Treasury bond 
C)  A decline in the U.S. Treasury bond yields 
D)  None of the above 
A)  A rise in VIX 
B)  An increase in the interest rate spread between a AAA corporate bond and an equivalent in maturity U.S. Treasury bond 
C)  A decline in the U.S. Treasury bond yields 
D)  None of the above D

Question 4

People who have certain health conditions may be more likely to seek better health insurances with higher coverage driving up the costs while people who are healthy may not want to spend much for health insurance as they believe they will need less healthcare. This is a problem of

Accepted Answer

A)  market for lemons. 
B)  adverse selection. 
C)  moral hazard. 
D)  all of the above. 
A)  market for lemons. 
B)  adverse selection. 
C)  moral hazard. 
D)  all of the above.

Question 5

An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?

Accepted Answer

A)  $16 
B)  $32 
C)  $40 
D)  $100 
A)  $16 
B)  $32 
C)  $40 
D)  $100

Question 6

The sequence of possible managerial decisions and their expected outcome under each set of circumstances can be represented and analyzed by using

Accepted Answer

A)  the minimax regret criterion. 
B)  a decision tree. 
C)  a payoff matrix. 
D)  simulation. 
A)  the minimax regret criterion. 
B)  a decision tree. 
C)  a payoff matrix. 
D)  simulation.

Question 7

According to the decision tree, what is the probability that the firm will earn 50,000?

Accepted Answer

The answer of According to the decision tree, what is...

Question 8

A payoff matrix presents all the information required to determine the optimal strategy using the

Accepted Answer

A)  expected value criterion. 
B)  the maximin criterion. 
C)  the utility maximization criterion. 
D)  simulation criterion. 
A)  expected value criterion. 
B)  the maximin criterion. 
C)  the utility maximization criterion. 
D)  simulation criterion.

Question 9

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is very successful and a $10 profit if the business is not very successful. Apply the maximin and minimax regret criteria to this decision.

Accepted Answer

A)  Maximin: Do not invest. Minimax regret: Do not invest. 
B)  Maximin: Do not invest. Minimax regret: Invest. 
C)  Maximin: Invest. Minimax regret: Do not invest. 
D)  Maximin: Invest. Minimax regret: Invest. 
A)  Maximin: Do not invest. Minimax regret: Do not invest. 
B)  Maximin: Do not invest. Minimax regret: Invest. 
C)  Maximin: Invest. Minimax regret: Do not invest. 
D)  Maximin: Invest. Minimax regret: Invest.

Question 10

A firm is considering two business projects. Project A will return a loss of $45 if conditions are poor, a profit of $35 if conditions are good, and a profit of $155 if conditions are excellent. Project B will return a loss of $100 if conditions are poor, a profit of $60 if conditions are good, and a profit of $300 if conditions are excellent. The probability distribution of conditions follows:
 $$\begin{array}{l}
\begin{array} {llll } 
\text {Conditions:}& \text {Poor }&\text {Good}&\text { Excellent}\
\text {Probabilities:}&\text { 40 percent}&\text { 50 percent}&\text {10 percent}\
\end{array}
\end{array}$$ 
(i)Calculate the expected value of each project and identify the preferred project according to this criterion.
(ii)Calculate the standard deviation of each project and identify the project that has the higher level of risk.
(iii)Calculate the coefficient of variation for each project and identify the preferred project according to this criterion.

Accepted Answer

The answer of A firm is considering two business projects....

Question 11

Consider investing into a project that can result in one of three possible outcomes. The first possible outcome is that the project will generate a return of 20,000. The first outcome has the probability of 50%. The second outcome is 10,000 and the probability is 30%. The third outcome is -50,000 (a negative return) and it carries the remaining probability of 20%. What is the expected return on this investment?

Accepted Answer

The answer of Consider investing into a project that can...

Question 12

Consider investing into a project that can result in one of three possible outcomes. The first possible outcome is that the project will generate a return of 5,000. The first outcome has the probability of 40%. The second outcome is 15,000 and the probability is 20%. The third outcome is -5,000 and it carries the remaining probability of 40%. What is the expected return on this investment?

Accepted Answer

The answer of Consider investing into a project that can...

Question 13

A construction project requires an initial investment of 2,000,000. The one and only return next year is estimated to be 2,500,00.
If the firm uses a discount rate of 10%, what is the net present value of the project?
What is the NPV of the project if the firm uses certainty-equivalent approach with certainty-equivalent coefficient of 0.9 and a risk-free rate of 4%?

Accepted Answer

The answer of A construction project requires an initial investment...

Question 14

A risk-return trade-off function

Accepted Answer

A)  shows the minimum expected return required to compensate an investor for accepting various levels of risk. 
B)  slopes upward for a risk-averse decision maker. 
C)  is horizontal for a risk-neutral decision maker. 
D)  All of the above are correct. 
A)  shows the minimum expected return required to compensate an investor for accepting various levels of risk. 
B)  slopes upward for a risk-averse decision maker. 
C)  is horizontal for a risk-neutral decision maker. 
D)  All of the above are correct.

Question 15

Hedging eliminates all risks associated with foreign investments.

Accepted Answer

A) True 
 B)False

Question 16

Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred

Accepted Answer

A)  is risk averse. 
B)  has a certainty-equivalent coefficient that is equal to one. 
C)  is risk neutral. 
D)  None of the above is correct. 
A)  is risk averse. 
B)  has a certainty-equivalent coefficient that is equal to one. 
C)  is risk neutral. 
D)  None of the above is correct.

Question 17

Three managers, John, Mary and Stephen work for a Firm A. John's utility function is U = X² , Mary's is $$U = \sqrt { X }$$ and Stephen's is U= X .
Which one of them is risk averse, risk neutral and risk seeking?
Show graphically how their utility functions differ.

Accepted Answer

The answer of Three managers, John, Mary and Stephen work...

Question 18

The difference between the required rate of return on a risky investment and the rate of return on risk-free asset is known as

Accepted Answer

A)  certainty equivalence. 
B)  certainty premium. 
C)  risk premium. 
D)  risk equivalence. 
A)  certainty equivalence. 
B)  certainty premium. 
C)  risk premium. 
D)  risk equivalence.

Question 19

After buying a used car, you find out that there were many hidden problems. If you knew these issues before, you would not have offered so much for it. This is a typical example of what economists call

Accepted Answer

A)  people being people. 
B)  untrustworthy sellers. 
C)  asymmetric information. 
D)  adverse selection. 
A)  people being people. 
B)  untrustworthy sellers. 
C)  asymmetric information. 
D)  adverse selection.

Question 20

If a person's utility doubles when his or her income doubles, then that person is risk

Accepted Answer

A)  averse. 
B)  neutral. 
C)  seeking. 
D)  There is not enough information given in the question to determine an answer. 
A)  averse. 
B)  neutral. 
C)  seeking. 
D)  There is not enough information given in the question to determine an answer.

If the market interest rate is 10 percent and a decision maker's risk-adjusted discount rate is 12 percent, then the decision maker

The riskier a project is, the smaller its certainty equivalent will be.

Which of the following would suggest a decline in the level of risk in the U.S. financial markets

People who have certain health conditions may be more likely to seek better health insurances with higher coverage driving up the costs while people who are healthy may not want to spend much for health insurance as they believe they will need less healthcare. This is a problem of

An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?

The sequence of possible managerial decisions and their expected outcome under each set of circumstances can be represented and analyzed by using

According to the decision tree, what is the probability that the firm will earn 50,000?

A payoff matrix presents all the information required to determine the optimal strategy using the

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is very successful and a $10 profit if the business is not very successful. Apply the maximin and minimax regret criteria to this decision.

A risk-return trade-off function

Hedging eliminates all risks associated with foreign investments.

Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred

Three managers, John, Mary and Stephen work for a Firm A. John's utility function is U = X² , Mary's is $U = \sqrt { X }$ and Stephen's is U= X . Which one of them is risk averse, risk neutral and risk seeking? Show graphically how their utility functions differ.

The difference between the required rate of return on a risky investment and the rate of return on risk-free asset is known as

After buying a used car, you find out that there were many hidden problems. If you knew these issues before, you would not have offered so much for it. This is a typical example of what economists call

If a person's utility doubles when his or her income doubles, then that person is risk

The Nature and Scope of Managerial Economics

Demand, Supply, and Equilibrium Analysis

Optimization Techniques and New Management Tools

Demand Theory

Demand Estimation

Demand Forecasting

Production Theory and Estimation

Cost Theory and Estimation

Market Structure: Perfect Competition, Monopoly, and Monopolistic Competition

Oligopoly and Firm Architecture

Game Theory and Strategic Behavior

Pricing Practices

Regulation and Antitrust: The Role of Government in the Economy

Long-Run Investment Decisions: Capital Budgeting

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Exam 14: Risk Analysis

If the market interest rate is 10 percent and a decision maker's risk-adjusted discount rate is 12 percent, then the decision maker

The riskier a project is, the smaller its certainty equivalent will be.

Which of the following would suggest a decline in the level of risk in the U.S. financial markets

People who have certain health conditions may be more likely to seek better health insurances with higher coverage driving up the costs while people who are healthy may not want to spend much for health insurance as they believe they will need less healthcare. This is a problem of

An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?

The sequence of possible managerial decisions and their expected outcome under each set of circumstances can be represented and analyzed by using

According to the decision tree, what is the probability that the firm will earn 50,000?

A payoff matrix presents all the information required to determine the optimal strategy using the

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is very successful and a $10 profit if the business is not very successful. Apply the maximin and minimax regret criteria to this decision.

A risk-return trade-off function

Hedging eliminates all risks associated with foreign investments.

Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred

Three managers, John, Mary and Stephen work for a Firm A. John's utility function is U = X² , Mary's is U=XU = \sqrt { X }U=X​ and Stephen's is U= X . Which one of them is risk averse, risk neutral and risk seeking? Show graphically how their utility functions differ.

The difference between the required rate of return on a risky investment and the rate of return on risk-free asset is known as

After buying a used car, you find out that there were many hidden problems. If you knew these issues before, you would not have offered so much for it. This is a typical example of what economists call

If a person's utility doubles when his or her income doubles, then that person is risk

The Nature and Scope of Managerial Economics

Demand, Supply, and Equilibrium Analysis

Optimization Techniques and New Management Tools

Demand Theory

Demand Estimation

Demand Forecasting

Production Theory and Estimation

Cost Theory and Estimation

Market Structure: Perfect Competition, Monopoly, and Monopolistic Competition

Oligopoly and Firm Architecture

Game Theory and Strategic Behavior

Pricing Practices

Regulation and Antitrust: The Role of Government in the Economy

Long-Run Investment Decisions: Capital Budgeting

Filters

Three managers, John, Mary and Stephen work for a Firm A. John's utility function is U = X² , Mary's is $U = \sqrt { X }$ and Stephen's is U= X . Which one of them is risk averse, risk neutral and risk seeking? Show graphically how their utility functions differ.