Question 1

Which of the following best illustrates diversification?

Accepted Answer

A) A company that produces many different products decides to produce fewer. 
B) After selling stock,corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C) Instead of holding only the stocks of companies engaged in the banking business,a person decides to hold stock in a number of different companies producing different goods and services. 
D) A person decides to purchase only stocks that have paid high dividends in the past. 
A) A company that produces many different products decides to produce fewer. 
B) After selling stock,corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C) Instead of holding only the stocks of companies engaged in the banking business,a person decides to hold stock in a number of different companies producing different goods and services. 
D) A person decides to purchase only stocks that have paid high dividends in the past.

Question 2

If a person is risk averse,then she has

Accepted Answer

A) diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
B) diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
C) increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
D) increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
A) diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
B) diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
C) increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
D) increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.

Question 3

If a person is risk averse,then as wealth increases,total utility of wealth

Accepted Answer

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

Question 4

Diminishing marginal utility of wealth implies that the utility function

Accepted Answer

A) has increasing slope and a person is risk averse. 
B) has increasing slope and a person is not risk averse. 
C) has decreasing slope and a person is risk averse 
D) has decreasing slope and a person is not risk averse. 
A) has increasing slope and a person is risk averse. 
B) has increasing slope and a person is not risk averse. 
C) has decreasing slope and a person is risk averse 
D) has decreasing slope and a person is not risk averse.

Question 5

Which of the following best illustrates moral hazard?

Accepted Answer

A) After a person obtains life insurance,she takes up skydiving. 
B) A person obtains insurance knowing he is in poor health. 
C) A person holds stock only in very risky corporations. 
D) A person holds stocks from only a few corporations. 
A) After a person obtains life insurance,she takes up skydiving. 
B) A person obtains insurance knowing he is in poor health. 
C) A person holds stock only in very risky corporations. 
D) A person holds stocks from only a few corporations.

Question 6

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Abby

Accepted Answer

A) and the example with Brad illustrate adverse selection. 
B) and the example with Brad illustrate moral hazard. 
C) illustrates adverse selection;the example with Brad illustrates moral hazard. 
D) illustrates moral hazard;the example with Brad illustrates adverse selection. 
A) and the example with Brad illustrate adverse selection. 
B) and the example with Brad illustrate moral hazard. 
C) illustrates adverse selection;the example with Brad illustrates moral hazard. 
D) illustrates moral hazard;the example with Brad illustrates adverse selection.

Question 7

A bank might make mortgages to people in different regions of the country.By doing so

Accepted Answer

A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions,but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions,but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 8

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

Accepted Answer

A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion. 
A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion.

Question 9

A risk-averse person has

Accepted Answer

A) utility and marginal utility curves that slope upward. 
B) utility and marginal utility curves that slope downward. 
C) a utility curve that slopes down and a marginal utility curve that slopes upward. 
D) a utility curve that slopes upward and a marginal utility curve that slopes downward. 
A) utility and marginal utility curves that slope upward. 
B) utility and marginal utility curves that slope downward. 
C) a utility curve that slopes down and a marginal utility curve that slopes upward. 
D) a utility curve that slopes upward and a marginal utility curve that slopes downward.

Question 10

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A) For Portfolio A,the average return is 6 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 6 percent and the standard deviation is 25 percent. 
B) For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent. 
C) For Portfolio A,the average return is 5 percent and the standard deviation is 25 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent. 
D) For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 25 percent. 
A) For Portfolio A,the average return is 6 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 6 percent and the standard deviation is 25 percent. 
B) For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent. 
C) For Portfolio A,the average return is 5 percent and the standard deviation is 25 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent. 
D) For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 25 percent.

Question 11

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A) 9% but not 10% 
B) 10% but not 11% 
C) 11% but not 12% 
D) None of the above is correct;a risk averse person would not accept any of the above bets. 
A) 9% but not 10% 
B) 10% but not 11% 
C) 11% but not 12% 
D) None of the above is correct;a risk averse person would not accept any of the above bets.

Question 12

Amanda talks with several different brokers at a social gathering.She hears the following advice from brokers A,B,and C.Which broker,if any,gave her incorrect advice?

Accepted Answer

A) Broker A: "There are risks in holding stocks,even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice. 
A) Broker A: "There are risks in holding stocks,even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice.

Question 13

For a risk averse person,

Accepted Answer

A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility. 
D) the utility function gets steeper as wealth increases. 
A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility. 
D) the utility function gets steeper as wealth increases.

Question 14

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you would use on your own car.

Accepted Answer

A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection. 
A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection.

Question 15

Diversifying

Accepted Answer

A) increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B) increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C) decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D) decreases the standard deviation of the value of a portfolio indicating its risk has decreased. 
A) increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B) increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C) decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D) decreases the standard deviation of the value of a portfolio indicating its risk has decreased.

Question 16

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk.What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years 
A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years

Question 17

Stockholders of ComfortAir Corporation,an air conditioner and furnace manufacturer,are concerned that the companies executives may take on greater risks than stockholders desire.This example illustrates

Accepted Answer

A) moral hazard and market risk. 
B) moral hazard and firm specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm specific risk. 
A) moral hazard and market risk. 
B) moral hazard and firm specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm specific risk.

Question 18

Figure 27-6.On the graph,x represents risk and y represents return.  
-Refer to Figure 27-6.Which of the following statements is correct?

Accepted Answer

A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk,the greater the return. 
A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk,the greater the return.

Question 19

Figure 27-4.The figure shows a utility function for Alex.  
-Refer to Figure 27-4.From the appearance of Alex's utility function,we know that

Accepted Answer

A) the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B) the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C) the property of increasing utility does not apply to Alex. 
D) the property of diminishing marginal utility does not apply to Alex. 
A) the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B) the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C) the property of increasing utility does not apply to Alex. 
D) the property of diminishing marginal utility does not apply to Alex.

Question 20

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 lowest 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%.

Exam 14: The Basic Tools of Finance: Managing Risk

Which of the following best illustrates diversification?

If a person is risk averse,then she has

If a person is risk averse,then as wealth increases,total utility of wealth

Diminishing marginal utility of wealth implies that the utility function

Which of the following best illustrates moral hazard?

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Abby

A bank might make mortgages to people in different regions of the country.By doing so

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

A risk-averse person has

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Amanda talks with several different brokers at a social gathering.She hears the following advice from brokers A,B,and C.Which broker,if any,gave her incorrect advice?

For a risk averse person,

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you would use on your own car.

Diversifying

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk.What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Stockholders of ComfortAir Corporation,an air conditioner and furnace manufacturer,are concerned that the companies executives may take on greater risks than stockholders desire.This example illustrates

Figure 27-6.On the graph,x represents risk and y represents return. -Refer to Figure 27-6.Which of the following statements is correct?

Figure 27-4.The figure shows a utility function for Alex. -Refer to Figure 27-4.From the appearance of Alex's utility function,we know that

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 lowest average annual rate of return?

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