Question 1

The _____ shows all of the combinations of risk and return that leaves an investor equally well off from holding either a low-risk or a high-risk investment.

Accepted Answer

A) indifference curve 
B) expectation 
C) standard deviation 
D) correlation coefficient 
A) indifference curve 
B) expectation 
C) standard deviation 
D) correlation coefficient

Question 2

Conditional probability of event A given that event B has already occurred is represented as the ratio between Pr[A and B] and Pr[B].

Accepted Answer

A) True 
 B)False

Question 3

Individuals in favor of privatization of Social Security believe that it would allow people to:

Accepted Answer

A) evade the exorbitant rates of Social Security taxes. 
B) substitute purchases of stocks and other financial assets for a portion of their Social Security taxes. 
C) lower their medical bill by taking extra precaution and care for their health. 
D) experience a lower inflation in healthcare services. 
A) evade the exorbitant rates of Social Security taxes. 
B) substitute purchases of stocks and other financial assets for a portion of their Social Security taxes. 
C) lower their medical bill by taking extra precaution and care for their health. 
D) experience a lower inflation in healthcare services.

Question 4

Which of the following options can be exercised upon expiration at a price equal to the average price of the underlying over its life span?

Accepted Answer

A) Average options 
B) Lookback options 
C) Barrier options 
D) Basket options 
A) Average options 
B) Lookback options 
C) Barrier options 
D) Basket options

Question 5

The utility function with respect to wealth is negatively sloped for a risk averse person.

Accepted Answer

A) True 
 B)False

Question 6

The nominal interest rate on a loan with an annual inflation rate of π and a real interest rate i is represented as:

Accepted Answer

A)   i+π÷iπ 
B)   i+π×iπ 
C)   i+π+iπ 
D)   i+π-iπ 
A)   i+π÷iπ 
B)   i+π×iπ 
C)   i+π+iπ 
D)   i+π-iπ

Question 7

A tycoon purchasing a loss making company will install new management teams only as long as the marginal value of the additional information these teams generate is worth the cost of installing them.

Accepted Answer

A) True 
 B)False

Question 8

In the figure given below A and B are two sets, such that Pr[A and B]=1/3, Pr[A]=2/4, Pr[B]=3/4.
Figure 16-1
  
-Refer to Figure 16-1.The conditional probability Pr[A/B] will be:

Accepted Answer

A) 4/9. 
B) 2/9. 
C) 4/6. 
D) 2/6. 
A) 4/9. 
B) 2/9. 
C) 4/6. 
D) 2/6.

Question 9

Why are interest rates considered to be the opportunity cost of investments?

Accepted Answer

Interest rates reflect peoples' preferen

Question 10

What is the maximum amount an investor should be willing to pay for a two-year $200 annuity, if the best alternative investment earns 20 percent per annum?

Accepted Answer

A) $305.56 
B) $166.67 
C) $138.89 
D) $268.79 
A) $305.56 
B) $166.67 
C) $138.89 
D) $268.79

Question 11

Calculate the annual return earned by a lender on a sum of $800 lent out at 8 percent interest, if prices inflate at the rate of 5 percent per annum.

Accepted Answer

A) $909.03 
B) $808.50 
C) $800.67 
D) $907.20 
A) $909.03 
B) $808.50 
C) $800.67 
D) $907.20

Question 12

If the writer of an option, holds shares of the stock or an actual quantity of the commodity when she writes the call option on it, her position is said to be:

Accepted Answer

A) protected. 
B) exposed. 
C) covered. 
D) naked. 
A) protected. 
B) exposed. 
C) covered. 
D) naked.

Question 13

A situation in which an individual has no information about probabilities and the underlying distributions of the possible outcomes of an investment choice is called:

Accepted Answer

A) a prior distribution. 
B) updating. 
C) risk tolerance. 
D) pure uncertainty. 
A) a prior distribution. 
B) updating. 
C) risk tolerance. 
D) pure uncertainty.

Question 14

Options do not eliminate the risks but they give people choices about which risks they will hold and help to price those risks they might wish to assign to others.

Accepted Answer

A) True 
 B)False

Question 15

Suppose a six-sided dice is rolled twice.The probability of getting a five during the second roll will depend on the outcome of the first roll.

Accepted Answer

A) True 
 B)False

Question 16

Given two investments P and Q, with the former having a mean 0.7 and variance 0.17 and the latter having a mean 0.7 and a variance 0.03, a risk-preferrer will be indifferent between the two.

Accepted Answer

A) True 
 B)False

Question 17

If an individual invests $20 in a bank deposit promising an interest of 12 percent per annum, compounded annually, he will receive $40 after 8 years.

Accepted Answer

A) True 
 B)False

Question 18

A risky borrower can pay a lower interest rate if:

Accepted Answer

A) she invests the amount in a profitable business. 
B) she can assure the lender of a low inflation rate. 
C) she makes a promise to repay within a short interval. 
D) she can arrange for a collateral. 
A) she invests the amount in a profitable business. 
B) she can assure the lender of a low inflation rate. 
C) she makes a promise to repay within a short interval. 
D) she can arrange for a collateral.

Question 19

Assume that Rudolf withdraws $600 from his bank account which was earning him 10 percent interest per annum to buy a high-end digital camera.The bank interest forgone by him will be the opportunity cost of this purchase.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is true of a "vanilla" bond?

Accepted Answer

A) It realizes capital gains in multiples of $1,000. 
B) It provides a fluctuating stream of interest income every year. 
C) It assures a return higher than the market rate of interest. 
D) It has a par value payable after a certain number of years from its issuance. 
A) It realizes capital gains in multiples of $1,000. 
B) It provides a fluctuating stream of interest income every year. 
C) It assures a return higher than the market rate of interest. 
D) It has a par value payable after a certain number of years from its issuance.

The _____ shows all of the combinations of risk and return that leaves an investor equally well off from holding either a low-risk or a high-risk investment.

Conditional probability of event A given that event B has already occurred is represented as the ratio between Pr[A and B] and Pr[B].

Individuals in favor of privatization of Social Security believe that it would allow people to:

Which of the following options can be exercised upon expiration at a price equal to the average price of the underlying over its life span?

The utility function with respect to wealth is negatively sloped for a risk averse person.

The nominal interest rate on a loan with an annual inflation rate of π and a real interest rate i is represented as:

A tycoon purchasing a loss making company will install new management teams only as long as the marginal value of the additional information these teams generate is worth the cost of installing them.

In the figure given below A and B are two sets, such that Pr[A and B]=1/3, Pr[A]=2/4, Pr[B]=3/4. Figure 16-1 -Refer to Figure 16-1.The conditional probability Pr[A/B] will be:

Why are interest rates considered to be the opportunity cost of investments?

What is the maximum amount an investor should be willing to pay for a two-year $200 annuity, if the best alternative investment earns 20 percent per annum?

Calculate the annual return earned by a lender on a sum of $800 lent out at 8 percent interest, if prices inflate at the rate of 5 percent per annum.

If the writer of an option, holds shares of the stock or an actual quantity of the commodity when she writes the call option on it, her position is said to be:

A situation in which an individual has no information about probabilities and the underlying distributions of the possible outcomes of an investment choice is called:

Options do not eliminate the risks but they give people choices about which risks they will hold and help to price those risks they might wish to assign to others.

Suppose a six-sided dice is rolled twice.The probability of getting a five during the second roll will depend on the outcome of the first roll.

Given two investments P and Q, with the former having a mean 0.7 and variance 0.17 and the latter having a mean 0.7 and a variance 0.03, a risk-preferrer will be indifferent between the two.

If an individual invests $20 in a bank deposit promising an interest of 12 percent per annum, compounded annually, he will receive $40 after 8 years.

A risky borrower can pay a lower interest rate if:

Assume that Rudolf withdraws $600 from his bank account which was earning him 10 percent interest per annum to buy a high-end digital camera.The bank interest forgone by him will be the opportunity cost of this purchase.

Which of the following is true of a "vanilla" bond?

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Conflict, Negotiation and Group Choice

Filters

Exam 16: Time, Risk and Options

The _____ shows all of the combinations of risk and return that leaves an investor equally well off from holding either a low-risk or a high-risk investment.

Conditional probability of event A given that event B has already occurred is represented as the ratio between Pr[A and B] and Pr[B].

Individuals in favor of privatization of Social Security believe that it would allow people to:

Which of the following options can be exercised upon expiration at a price equal to the average price of the underlying over its life span?

The utility function with respect to wealth is negatively sloped for a risk averse person.

The nominal interest rate on a loan with an annual inflation rate of π and a real interest rate i is represented as:

A tycoon purchasing a loss making company will install new management teams only as long as the marginal value of the additional information these teams generate is worth the cost of installing them.

In the figure given below A and B are two sets, such that Pr[A and B]=1/3, Pr[A]=2/4, Pr[B]=3/4. Figure 16-1 -Refer to Figure 16-1.The conditional probability Pr[A/B] will be:

Why are interest rates considered to be the opportunity cost of investments?

What is the maximum amount an investor should be willing to pay for a two-year $200 annuity, if the best alternative investment earns 20 percent per annum?

Calculate the annual return earned by a lender on a sum of $800 lent out at 8 percent interest, if prices inflate at the rate of 5 percent per annum.

If the writer of an option, holds shares of the stock or an actual quantity of the commodity when she writes the call option on it, her position is said to be:

A situation in which an individual has no information about probabilities and the underlying distributions of the possible outcomes of an investment choice is called:

Options do not eliminate the risks but they give people choices about which risks they will hold and help to price those risks they might wish to assign to others.

Suppose a six-sided dice is rolled twice.The probability of getting a five during the second roll will depend on the outcome of the first roll.

Given two investments P and Q, with the former having a mean 0.7 and variance 0.17 and the latter having a mean 0.7 and a variance 0.03, a risk-preferrer will be indifferent between the two.

If an individual invests $20 in a bank deposit promising an interest of 12 percent per annum, compounded annually, he will receive $40 after 8 years.

A risky borrower can pay a lower interest rate if:

Assume that Rudolf withdraws $600 from his bank account which was earning him 10 percent interest per annum to buy a high-end digital camera.The bank interest forgone by him will be the opportunity cost of this purchase.

Which of the following is true of a "vanilla" bond?

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Conflict, Negotiation and Group Choice

Filters