Question 1

A risk-neutral individual will make investment decisions purely based on expected value because

Accepted Answer

A) she doesn't care about utility. 
B) utility is a linear function of wealth. 
C) she loves to take risk. 
D) expected value is always more than expected utility. 
A) she doesn't care about utility. 
B) utility is a linear function of wealth. 
C) she loves to take risk. 
D) expected value is always more than expected utility. B

Question 2

If an individual makes her investment decisions based solely on the Expected Value criterion, one can conclude that she is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy. 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy. B

Question 3

A risk premium

Accepted Answer

A) is required to get a risk-neutral person to make a fair bet. 
B) is the maximum amount needed to compensate a decision-maker to willingly take a risk. 
C) is the maximum amount a decision-maker would pay to avoid taking a risk. 
D) is the minimum amount a decision-maker would pay to avoid taking a risk. 
A) is required to get a risk-neutral person to make a fair bet. 
B) is the maximum amount needed to compensate a decision-maker to willingly take a risk. 
C) is the maximum amount a decision-maker would pay to avoid taking a risk. 
D) is the minimum amount a decision-maker would pay to avoid taking a risk. C

Question 4

-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. If Bob could keep $50 with certainty, his utility would be

Accepted Answer

A) a. 
B) b. 
C) c. 
D) d. 
A) a. 
B) b. 
C) c. 
D) d.

Question 5

The gambler's fallacy suggests that what happened in the past will influence the present. Suffering from the gambler's fallacy is most likely TRUE in which of the following situations?

Accepted Answer

A) flipping cards from a single deck 
B) tossing a fair coin 
C) the quality of play of a baseball team 
D) horse racing 
A) flipping cards from a single deck 
B) tossing a fair coin 
C) the quality of play of a baseball team 
D) horse racing

Question 6

Buying a diversified mutual stock fund allows you to

Accepted Answer

A) completely avoid all types of risk. 
B) avoid only random, unsystematic risk. 
C) avoid only systematic risk. 
D) avoid risk only when all the stock prices are perfectly correlated. 
A) completely avoid all types of risk. 
B) avoid only random, unsystematic risk. 
C) avoid only systematic risk. 
D) avoid risk only when all the stock prices are perfectly correlated.

Question 7

Behavioral economics under uncertainty documents that

Accepted Answer

A) people's behavior often differs from what standard expected utility theory predicts. 
B) people's behavior can change with their circumstances. 
C) people might put considerable weight on certain outcomes. 
D) All of the above. 
A) people's behavior often differs from what standard expected utility theory predicts. 
B) people's behavior can change with their circumstances. 
C) people might put considerable weight on certain outcomes. 
D) All of the above.

Question 8

All else held constant, as the variance of a payoff increases, the

Accepted Answer

A) expected value of the payoff increases. 
B) risk of the payoff increases. 
C) expected value of the payoff decreases. 
D) risk of the payoff decreases. 
A) expected value of the payoff increases. 
B) risk of the payoff increases. 
C) expected value of the payoff decreases. 
D) risk of the payoff decreases.

Question 9

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

Accepted Answer

E(X)= (0 ∗ .2)+ (100 ∗ .4)+ (300 ∗ .2)=

Question 10

-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 11

-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. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Accepted Answer

A) $0. 
B) $20. 
C) $30. 
D) $50. 
A) $0. 
B) $20. 
C) $30. 
D) $50.

Question 12

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

Accepted Answer

A) 1/50 
B) 1/25 
C) 1/2 
D) 1 (100%) 
A) 1/50 
B) 1/25 
C) 1/2 
D) 1 (100%)

Question 13

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 14

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

Accepted Answer

A) 20/40 
B) 20/60 
C) 40/60 
D) 0 
A) 20/40 
B) 20/60 
C) 40/60 
D) 0

Question 15

Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is

Accepted Answer

A) risk preferring. 
B) risk neutral. 
C) risk averse. 
D) Any of the above. 
A) risk preferring. 
B) risk neutral. 
C) risk averse. 
D) Any of the above.

Question 16

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Accepted Answer

A) True 
 B)False

Question 17

If an event is likely to occur, which probability is a reasonable estimate?

Accepted Answer

A) 0.32 
B) 0.79 
C) 1 
D) Not enough information to determine. 
A) 0.32 
B) 0.79 
C) 1 
D) Not enough information to determine.

Question 18

Expected value represents

Accepted Answer

A) the actual payment one expects to receive. 
B) the average of all payments one would receive if one undertook the risky event many times. 
C) the payment one receives if he or she makes the correct decision. 
D) the payment that is most likely to occur. 
A) the actual payment one expects to receive. 
B) the average of all payments one would receive if one undertook the risky event many times. 
C) the payment one receives if he or she makes the correct decision. 
D) the payment that is most likely to occur.

Question 19

What is one reason a gambler might bet $1,000 that a team that is ranked sixteenth will win the NCAA basketball tournament?

Accepted Answer

A) irrationality 
B) overconfidence 
C) exuberance 
D) gambler's fallacy 
A) irrationality 
B) overconfidence 
C) exuberance 
D) gambler's fallacy

Question 20

In terms of the stock market, systematic risk refers to the fact that

Accepted Answer

A) some stocks have higher returns than others. 
B) some stocks' returns have a higher variance than others. 
C) all stock prices are correlated with the health of the economy. 
D) most stock prices are perfectly negatively correlated. 
A) some stocks have higher returns than others. 
B) some stocks' returns have a higher variance than others. 
C) all stock prices are correlated with the health of the economy. 
D) most stock prices are perfectly negatively correlated.

A risk-neutral individual will make investment decisions purely based on expected value because

If an individual makes her investment decisions based solely on the Expected Value criterion, one can conclude that she is

A 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. If Bob could keep $50 with certainty, his utility would be

The gambler's fallacy suggests that what happened in the past will influence the present. Suffering from the gambler's fallacy is most likely TRUE in which of the following situations?

Buying a diversified mutual stock fund allows you to

Behavioral economics under uncertainty documents that

All else held constant, as the variance of a payoff increases, the

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

-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

-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. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

Someone who is risk-neutral has

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

If an event is likely to occur, which probability is a reasonable estimate?

Expected value represents

What is one reason a gambler might bet $1,000 that a team that is ranked sixteenth will win the NCAA basketball tournament?

In terms of the stock market, systematic risk refers to the fact that

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

A risk-neutral individual will make investment decisions purely based on expected value because

If an individual makes her investment decisions based solely on the Expected Value criterion, one can conclude that she is

A 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. If Bob could keep $50 with certainty, his utility would be

The gambler's fallacy suggests that what happened in the past will influence the present. Suffering from the gambler's fallacy is most likely TRUE in which of the following situations?

Buying a diversified mutual stock fund allows you to

Behavioral economics under uncertainty documents that

All else held constant, as the variance of a payoff increases, the

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

-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

-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. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

Someone who is risk-neutral has

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

If an event is likely to occur, which probability is a reasonable estimate?

Expected value represents

What is one reason a gambler might bet $1,000 that a team that is ranked sixteenth will win the NCAA basketball tournament?

In terms of the stock market, systematic risk refers to the fact that

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