Question 1

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct. 
A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct.

Question 2

A measure of the volatility of a variable is its

Accepted Answer

A) present value. 
B) future value. 
C) return. 
D) standard deviation. 
A) present value. 
B) future value. 
C) return. 
D) standard deviation.

Question 3

Figure 27-1.The figure shows a utility function.  
-Refer to Figure 27-1.What is measured along the vertical axis?

Accepted Answer

A) risk aversion 
B) marginal utility 
C) utility 
D) the number of units of a good that can be purchased 
A) risk aversion 
B) marginal utility 
C) utility 
D) the number of units of a good that can be purchased

Question 4

Economists have developed models of risk aversion using the concept of

Accepted Answer

A) utility and the associated assumption of diminishing marginal utility. 
B) utility and the associated assumption of increasing marginal utility. 
C) income and the associated assumption of diminishing marginal wealth. 
D) income and the associated assumption of increasing marginal wealth. 
A) utility and the associated assumption of diminishing marginal utility. 
B) utility and the associated assumption of increasing marginal utility. 
C) income and the associated assumption of diminishing marginal wealth. 
D) income and the associated assumption of increasing marginal wealth.

Question 5

Figure 27-5.The figure shows a utility function for Dexter.  
-Refer to Figure 27-5.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then

Accepted Answer

A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300. 
A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Question 6

Which of the following games might a risk-averse person play?

Accepted Answer

A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D) All of the above are correct. 
A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D) All of the above are correct.

Question 7

Svetlana is risk averse.Which of the following is correct about Svetlana?

Accepted Answer

A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct. 
A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct.

Question 8

As the number of stocks in a person's portfolio increases,

Accepted Answer

A) the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio. 
B) the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio. 
C) the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio. 
D) the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio. 
A) the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio. 
B) the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio. 
C) the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio. 
D) the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio.

Question 9

The utility function of a risk-averse person has a

Accepted Answer

A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases. 
A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases.

Question 10

Figure 27-2.The figure shows a utility function for Britney.  
-Refer to Figure 27-2.From the appearance of the utility function,we know that

Accepted Answer

A) Britney is risk averse. 
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Britney. 
D) All of the above are correct. 
A) Britney is risk averse. 
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Britney. 
D) All of the above are correct.

Question 11

The idea of insurance

Accepted Answer

A) would not appeal to a risk-averse person. 
B) is,other things the same,to reduce the probability of a fire,accident,or death. 
C) is to share risk. 
D) is to provide a sure thing,not a gamble. 
A) would not appeal to a risk-averse person. 
B) is,other things the same,to reduce the probability of a fire,accident,or death. 
C) is to share risk. 
D) is to provide a sure thing,not a gamble.

Question 12

Which of the following actions best illustrates adverse selection?

Accepted Answer

A) A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B) A person dislikes losing $400 more than he likes winning $400. 
C) After obtaining automobile insurance a person drives less carefully than before. 
D) A person intending to take up dangerous hobbies applies for life insurance. 
A) A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B) A person dislikes losing $400 more than he likes winning $400. 
C) After obtaining automobile insurance a person drives less carefully than before. 
D) A person intending to take up dangerous hobbies applies for life insurance.

Question 13

If a stock or bond is risky

Accepted Answer

A) risk averse people may be willing to hold it as part of a diversified portfolio. 
B) risk averse people may be willing to hold it if the expected return is high enough. 
C) both A and B are correct. 
D) risk averse people will not hold it. 
A) risk averse people may be willing to hold it as part of a diversified portfolio. 
B) risk averse people may be willing to hold it if the expected return is high enough. 
C) both A and B are correct. 
D) risk averse people will not hold it.

Question 14

Figure 27-1.The figure shows a utility function.  
-Refer to Figure 27-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A) the distance between the origin and point B 
B) the distance between the origin and point C 
C) the distance between point A and point C 
D) the distance between point B and point C 
A) the distance between the origin and point B 
B) the distance between the origin and point C 
C) the distance between point A and point C 
D) the distance between point B and point C

Question 15

Samantha holds stocks in four companies.If she adds stocks of several more companies she will decrease

Accepted Answer

A) firm specific risk and market risk. 
B) firm specific risk but not market risk. 
C) market risk but not firm specific risk. 
D) neither firm specific nor market risk. 
A) firm specific risk and market risk. 
B) firm specific risk but not market risk. 
C) market risk but not firm specific risk. 
D) neither firm specific nor market risk.

Question 16

A risk-averse person

Accepted Answer

A) has a utility curve where the slope increases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B) has a utility curve where the slope increases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C) has a utility curve where the slope decreases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D) has a utility curve where the slope decreases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
A) has a utility curve where the slope increases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B) has a utility curve where the slope increases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C) has a utility curve where the slope decreases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D) has a utility curve where the slope decreases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

Question 17

Over the past two centuries,the average annual rates of return were about

Accepted Answer

A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct. 
A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct.

Question 18

Susan is planning to invest in one of four stock portfolios,and her financial advisor has given her details regarding the risk associated with each portfolio.Which of the following portfolios would you expect to have the highest average annual rate of return?

Accepted Answer

A) ​A portfolio with a standard deviation of 3%. 
B) ​​​A portfolio with a standard deviation of 6%. 
C) ​A portfolio with a standard deviation of 9%. 
D) ​A portfolio with a standard deviation of 12%. 
A) ​A portfolio with a standard deviation of 3%. 
B) ​​​A portfolio with a standard deviation of 6%. 
C) ​A portfolio with a standard deviation of 9%. 
D) ​A portfolio with a standard deviation of 12%.

Question 19

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A) firm-specific risk,and so they do not need to worry about their wealth decreasing as a result of recessions. 
B) market risk,and so they do not need to worry about their wealth decreasing as a result of recessions. 
C) firm-specific risk,but still they have reason to worry about their wealth decreasing as a result of recessions. 
D) market risk,but still they have reason to worry about their wealth decreasing as a result of recessions. 
A) firm-specific risk,and so they do not need to worry about their wealth decreasing as a result of recessions. 
B) market risk,and so they do not need to worry about their wealth decreasing as a result of recessions. 
C) firm-specific risk,but still they have reason to worry about their wealth decreasing as a result of recessions. 
D) market risk,but still they have reason to worry about their wealth decreasing as a result of recessions.

Question 20

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

Accepted Answer

A) every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B) every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C) the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D) the average risk-averse person will earn a lower rate of return than the average non-risk-averse person. 
A) every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B) every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C) the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D) the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

Exam 14: The Basic Tools of Finance: Managing Risk

Which of the following is correct concerning a risk-averse person?

A measure of the volatility of a variable is its

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.What is measured along the vertical axis?

Economists have developed models of risk aversion using the concept of

Figure 27-5.The figure shows a utility function for Dexter. -Refer to Figure 27-5.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then

Which of the following games might a risk-averse person play?

Svetlana is risk averse.Which of the following is correct about Svetlana?

As the number of stocks in a person's portfolio increases,

The utility function of a risk-averse person has a

Figure 27-2.The figure shows a utility function for Britney. -Refer to Figure 27-2.From the appearance of the utility function,we know that

The idea of insurance

Which of the following actions best illustrates adverse selection?

If a stock or bond is risky

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Samantha holds stocks in four companies.If she adds stocks of several more companies she will decrease

A risk-averse person

Over the past two centuries,the average annual rates of return were about

Susan is planning to invest in one of four stock portfolios,and her financial advisor has given her details regarding the risk associated with each portfolio.Which of the following portfolios would you expect to have the highest average annual rate of return?

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

Ten Principles of Economics

Ten Principles of Economics: How People Make Decisions

Ten Principles of Economics: How People Interact

Ten Principles of Economics: How the Economy As a Whole Works

Ten Principles of Economics: Part A

Ten Principles of Economics: Part B

Thinking Like an Economist

Thinking Like an Economist: The Economist As Scientist

Thinking Like an Economist: The Economist As Policy Adviser

Thinking Like an Economist: Why Economists Disagree

Thinking Like an Economist: Lets Get Going

Thinking Like an Economist: Graphing a Brief Review

Thinking Like an Economist: Part A

Thinking Like an Economist: Part B

Interdependence and the Gains From Trade

Interdependence and the Gains From Trade: A Parable for the Modern Economy

Interdependence and the Gains From Trade: Comparative Advantage the Driving Force of Specialization

Interdependence and the Gains From Trade: Applications of Comparative Advantage

Interdependence and the Gains From Trade: Conclusion

Interdependence and the Gains From Trade: Part A

Interdependence and the Gains From Trade: Part B

The Market Forces of Supply and Demand

The Market Forces of Supply and Demand:Markets and Competition

The Market Forces of Supply and Demand: Demand

The Market Forces of Supply and Demand: Supply

The Market Forces of Supply and Demand: Supply and Demand Together

The Market Forces of Supply and DemandConclusion How Prices Allocate Resources

The Market Forces of Supply and Demand: Part A

The Market Forces of Supply and Demand: Part B

Elasticity and Its Applications

Elasticity and Its Applications: The Elasticity of Demand

Elasticity and Its Applications: The Elasticity of Supply

Elasticity and Its Applications: Three Applications of Supply,demand,and Elasticity

Elasticity and Its Applications: Part A

Elasticity and Its Applications: Part B

Supply Demand and Government Policies

Supply Demand and Government Policies: Controls on Prices

Supply Demand and Government Policies: Taxes

Supply Demand and Government Policies: Part A

Supply Demand and Government Policies: Part B

Consumers Producers and the Efficiency of Markets

Consumers Producers and the Efficiency of Markets: Consumer Surplus

Consumers Producers and the Efficiency of Markets: Producer Surplus

Consumers Producers and the Efficiency of Markets: Market Efficiency

Consumers Producers and the Efficiency of Markets: Conclusion Market Efficiency and Market Failure

Consumers Producers and the Efficiency of Markets: Part A

Consumers Producers and the Efficiency of Markets: Part B

Application the Cost of Taxation

Application the Cost of Taxation: The Deadweight Loss of Taxation

Application the Cost of Taxation: The Determinants of the Deadweight Loss

Application the Cost of Taxation: Deadweight Loss and Tax Revenue As Taxes Vary

Application the Cost of Taxation: Conclusion

Application the Cost of Taxation: Part A

Application the Cost of Taxation: Part B

Application International Trade

Application International Trade: The Determinants of Trade

Application International Trade: The Winners and Losers From Trade

Application International Trade: The Arguments for Restricting Trade

Application International Trade: Conclusion