Question 1

To diversify,a homeowner with a variable-rate mortgage should choose investments that

Accepted Answer

A) pay higher returns when interest rates rise and lower returns when interest rates fall. 
B) pay lower returns when interest rates rise and higher returns when interest rates fall. 
C) provide a higher return than the market average. 
D) provide a lower return than the market average. 
A) pay higher returns when interest rates rise and lower returns when interest rates fall. 
B) pay lower returns when interest rates rise and higher returns when interest rates fall. 
C) provide a higher return than the market average. 
D) provide a lower return than the market average.

Question 2

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Accepted Answer

A) market risk by more than an increase from 1 to 10. 
B) market risk by less than an increase from 1 to 10. 
C) firm-specific risk by more than an increase from 1 to 10. 
D) firm-specific risk by less than an increase from 1 to 10. 
A) market risk by more than an increase from 1 to 10. 
B) market risk by less than an increase from 1 to 10. 
C) firm-specific risk by more than an increase from 1 to 10. 
D) firm-specific risk by less than an increase from 1 to 10.

Question 3

Shawn determines that if Lexall Corporation has high revenues,then Waters Corporation will have low revenues,and that if Lexall Corporation has low revenues,then Waters Corporation will have high revenues.Shawn buys stock in both corporations.

Accepted Answer

A) He has reduced firm-specific risk but not market risk. 
B) He has reduced market risk,but not firm-specific risk. 
C) He had reduce both firm-specific risk and market risk. 
D) He has reduced neither firm-specific risk nor market risk. 
A) He has reduced firm-specific risk but not market risk. 
B) He has reduced market risk,but not firm-specific risk. 
C) He had reduce both firm-specific risk and market risk. 
D) He has reduced neither firm-specific risk nor market risk.

Question 4

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Accepted Answer

A) increasing marginal utility of wealth and is risk averse. 
B) increasing marginal utility of wealth and is not risk averse. 
C) decreasing marginal utility of wealth and is risk averse. 
D) decreasing marginal utility of wealth and is not risk averse. 
A) increasing marginal utility of wealth and is risk averse. 
B) increasing marginal utility of wealth and is not risk averse. 
C) decreasing marginal utility of wealth and is risk averse. 
D) decreasing marginal utility of wealth and is not risk averse.

Question 5

Risk aversion helps to explain various things we observe in the economy,including

Accepted Answer

A) adherence to the old adage,"Don't put all your eggs in one basket." 
B) insurance. 
C) the risk-return trade-off. 
D) All of the above are correct. 
A) adherence to the old adage,"Don't put all your eggs in one basket." 
B) insurance. 
C) the risk-return trade-off. 
D) All of the above are correct.

Question 6

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

Question 7

Figure 27-1.The figure shows a utility function.  
-Refer to Figure 27-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

Accepted Answer

A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth. 
A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.

Question 8

Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A) risk increases at an increasing rate. 
B) risk increases at a decreasing rate. 
C) risk decreases at an increasing rate. 
D) risk decreases at a decreasing rate. 
A) risk increases at an increasing rate. 
B) risk increases at a decreasing rate. 
C) risk decreases at an increasing rate. 
D) risk decreases at a decreasing rate.

Question 9

The risk of a portfolio

Accepted Answer

A) increases as the number of stocks in the portfolio increases. 
B) is usually measured using a statistic called the standard diversification. 
C) is positively related to the average return of the portfolio. 
D) bears no relationship to the average return of the portfolio. 
A) increases as the number of stocks in the portfolio increases. 
B) is usually measured using a statistic called the standard diversification. 
C) is positively related to the average return of the portfolio. 
D) bears no relationship to the average return of the portfolio.

Question 10

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope. 
A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope.

Question 11

As the number of stocks in a portfolio rises,

Accepted Answer

A) both firm-specific risks and market risk fall. 
B) firm-specific risks fall;market risk does not. 
C) market risk falls;firm-specific risks do not. 
D) neither firm-specific risks nor market risk falls. 
A) both firm-specific risks and market risk fall. 
B) firm-specific risks fall;market risk does not. 
C) market risk falls;firm-specific risks do not. 
D) neither firm-specific risks nor market risk falls.

Question 12

Which of the following statements is correct?

Accepted Answer

A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection,but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard,but they cannot fully guard against the problem of adverse selection. 
A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection,but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard,but they cannot fully guard against the problem of adverse selection.

Question 13

Figure 27-5.The figure shows a utility function for Dexter.  
-Refer to Figure 27-5.Suppose Dexter begins with $1,300 in wealth.Starting from there,

Accepted Answer

A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph. 
A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph.

Question 14

From the standpoint of the economy as a whole,the role of

Accepted Answer

A) the interest rate is to make sure that the price of bonds increases over time. 
B) diversification is to eliminate market risk. 
C) insurance is to reduce the risks inherent in life. 
D) insurance is to spread risks around more efficiently. 
A) the interest rate is to make sure that the price of bonds increases over time. 
B) diversification is to eliminate market risk. 
C) insurance is to reduce the risks inherent in life. 
D) insurance is to spread risks around more efficiently.

Question 15

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Accepted Answer

A) provide a higher return than the market average. 
B) provide a lower return than the market average. 
C) pay higher returns when interest rates rise and lower returns when interest rates fall. 
D) pay lower returns when interest rates rise and higher returns when interest rates fall. 
A) provide a higher return than the market average. 
B) provide a lower return than the market average. 
C) pay higher returns when interest rates rise and lower returns when interest rates fall. 
D) pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 16

Which of the following actions best illustrates adverse selection?

Accepted Answer

A) A person adds risky stock to his portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently. 
A) A person adds risky stock to his portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question 17

Figure 27-2.The figure shows a utility function for Britney.  
-Refer to Figure 27-2.Suppose the vertical distance between the points (0,A)and (0,B)is 5.If her wealth increased from $1,050 to $1,350,then

Accepted Answer

A) Britney's subjective measure of her well-being would increase by less than 5 units. 
B) Britney's subjective measure of her well-being would increase by more than 5 units. 
C) Britney would change from being a risk-averse person into a person who is not risk averse. 
D) Britney would change from being a person who is not risk averse into a risk-averse person. 
A) Britney's subjective measure of her well-being would increase by less than 5 units. 
B) Britney's subjective measure of her well-being would increase by more than 5 units. 
C) Britney would change from being a risk-averse person into a person who is not risk averse. 
D) Britney would change from being a person who is not risk averse into a risk-averse person.

Question 18

There are many concerns for risk-averse lenders.Consider the following: 1.Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans.2.Lenders are concerned that real GDP will decline leading to reduced corporate profits.3.Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A) 1 is market risk;2 is firm-specific risk 
B) 2 is market risk;3 is firm-specific risk 
C) 3 is market risk;1 is firm-specific risk 
D) 2 is firm-specific risk;3 is market risk 
A) 1 is market risk;2 is firm-specific risk 
B) 2 is market risk;3 is firm-specific risk 
C) 3 is market risk;1 is firm-specific risk 
D) 2 is firm-specific risk;3 is market risk

Question 19

Figure 27-6.On the graph,x represents risk and y represents return.  
-Refer to Figure 27-6.Point A represents a situation in which

Accepted Answer

A) all of a person's savings are allocated to a class of safe assets. 
B) the person knows with certainty that his or her return will be 3 percent. 
C) the standard deviation of the person's portfolio is zero. 
D) All of the above are correct. 
A) all of a person's savings are allocated to a class of safe assets. 
B) the person knows with certainty that his or her return will be 3 percent. 
C) the standard deviation of the person's portfolio is zero. 
D) All of the above are correct.

Question 20

If Joanna is risk averse,then

Accepted Answer

A) her utility function exhibits the property of decreasing utility. 
B) her utility function exhibits the property of increasing marginal utility. 
C) she dislikes bad things more than she likes comparable good things. 
D) she is unlike most people,because most people are not risk averse. 
A) her utility function exhibits the property of decreasing utility. 
B) her utility function exhibits the property of increasing marginal utility. 
C) she dislikes bad things more than she likes comparable good things. 
D) she is unlike most people,because most people are not risk averse.

Exam 14: The Basic Tools of Finance: Managing Risk

To diversify,a homeowner with a variable-rate mortgage should choose investments that

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Shawn determines that if Lexall Corporation has high revenues,then Waters Corporation will have low revenues,and that if Lexall Corporation has low revenues,then Waters Corporation will have high revenues.Shawn buys stock in both corporations.

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Risk aversion helps to explain various things we observe in the economy,including

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

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

The risk of a portfolio

Diminishing marginal utility of wealth implies that the utility function is

As the number of stocks in a portfolio rises,

Which of the following statements is correct?

Figure 27-5.The figure shows a utility function for Dexter. -Refer to Figure 27-5.Suppose Dexter begins with $1,300 in wealth.Starting from there,

From the standpoint of the economy as a whole,the role of

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Which of the following actions best illustrates adverse selection?

Figure 27-2.The figure shows a utility function for Britney. -Refer to Figure 27-2.Suppose the vertical distance between the points (0,A)and (0,B)is 5.If her wealth increased from $1,050 to $1,350,then

Figure 27-6.On the graph,x represents risk and y represents return. -Refer to Figure 27-6.Point A represents a situation in which

If Joanna is risk averse,then

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

Application International Trade: Part A