Adverse Selection Is a Problem Associated with Equity and Debt

Multiple Choice

Adverse selection is a problem associated with equity and debt contracts arising from ________.

A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults
C) the borrower's lack of incentive to seek a loan for highly risky investments
D) the lender's inability to restrict the borrower from changing his behavior once given a loan