Question 1

Optimal capital structure is a company's optimal mix of:

Accepted Answer

A) short-term and long-term loans. 
B) common and preference shares. 
C) short-term and long-term liabilities. 
D) debt and equity financing. 
E) bills receivable and bills payable.

Question 2

Under partial insurance, companies offer products with deductibles.If an individual opts for a deductible, he/she will have to:

Accepted Answer

A) bear the entire loss incurred and then get it reimbursed form the insurance company. 
B) bear the initial part of the losses incurred. 
C) pay very high premiums to gain adequate protection. 
D) opt for a whole life insurance policy as additional insurance. 
E) return fifty percent of the amount received as face value, back to the insurer.

Question 3

Identify the probability that is based on a person's beliefs and experiences, and belongs to the realm of behavioral economics rather than traditional rationality-based economics.

Accepted Answer

A) Empirical probability 
B) Objective probability 
C) Experiential probability 
D) Philosophical probability 
E) Subjective probability

Question 4

In the utility theory, under the assumption of _____, individuals' preferences avoid any kind of circularity.

Accepted Answer

The answer of In the utility theory, under the assumption...

Question 5

According to the utility theory, if one week of food is preferred to one week of clothing, then two weeks of food is a preferred package to one week of food.Identify this assumption on preference.

Accepted Answer

A) Monotonicity 
B) Rationality 
C) Convexity 
D) Mix-is-better 
E) Completeness

Question 6

Information asymmetry problem related to hidden information is referred to as:

Accepted Answer

A) prisoner's dilemma. 
B) principle-agent problem. 
C) moral hazard. 
D) adverse selection. 
E) fundamental attribution error.

Question 7

While utility theory deals with situations in which there is no uncertainty, this theory deals with choices individuals make when the outcomes they face are uncertain.Identify the theory.

Accepted Answer

A) Game theory 
B) Expected utility theory 
C) Expectation theory 
D) Normative theory 
E) Self-serving theory

Question 8

Identify the utility function of a risk averse individual.

Accepted Answer

A) U(W) = $\surd$W 
B) U(W) = W3 
C) U(W) = W2 
D) U(W) = W 
E) U(W) = 1/W

Question 9

An individual whose preference is characterized by the increasing marginal utility would have a convex utility function.

Accepted Answer

A) True 
 B)False

Question 10

The realm of academic study that deals with departures from E(U) maximization behavior is called behavioral economics.

Accepted Answer

A) True 
 B)False

Question 11

In a football tournament, if University of Florida beats Ohio State, and Ohio State beats Georgia Tech, it does not mean that Florida beats Georgia Tech.This scenario violates the rationality assumption on preference of the utility theory.Identify this assumption of preference.

Accepted Answer

A) Transitivity of preference 
B) Convexity of preference 
C) Completeness of preference 
D) Monotonicity of preference 
E) Circularity of preference

Question 12

Identify the utility function of a risk seeking individual.

Accepted Answer

A) U(W) = $\surd$W 
B) U(W) = 1/W2 
C) U(W) = W2 
D) U(W) = W 
E) U(W) = 1/W

Question 13

A kind of information asymmetry lies in the hidden action, wherein one party's actions are not observable by the counterparty to the contract.Economists study this issue as one of _____.

Accepted Answer

The answer of A kind of information asymmetry lies in...

Question 14

The principle-agent problem can be categorized as an information symmetry problem.Identify this information symmetry.

Accepted Answer

A) Adverse selection 
B) Fundamental attribution error 
C) Prisoner's dilemma 
D) Moral hazard 
E) False consensus

Question 15

Which of the following statements is true companies hedging behavior?

Accepted Answer

A) Managers hedge because they are diversified. 
B) Hedging can increase debt capacity. 
C) Unregulated companies are found to hedge more than regulated ones. 
D) Managers want to increase expected bankruptcy costs. 
E) Managers hedge because owners are undiversified.

Question 16

Identify the utility that can represent the absolute level of satisfaction.

Accepted Answer

A) Circular utility 
B) Ordinal utility 
C) Marginal utility 
D) Normative utility 
E) Cardinal utility

Question 17

Managers can diversify risk, but owners (principals) cannot.

Accepted Answer

A) True 
 B)False

Question 18

Utility theory is a negative theory that dictates that people should behave in the manner prescribed by it.

Accepted Answer

A) True 
 B)False

Question 19

Identify the correct statement about corporations.

Accepted Answer

A) Corporations are risk neutral because they can diversify all risks except idiosyncratic risk. 
B) Corporations should ideally hedge risks only at prices lower than the AFP. 
C) Corporations buy hedging instruments at greater price than AFP. 
D) The individual level utility functions of risk aversion can explain the hedging behavior of corporations. 
E) Corporations are risk neutral because they can diversify systematic risk.

Question 20

According to the utility theory, the property wherein an individual's preferences enable him or her to compare any given bundle with any other bundle is called the _____ property of preferences.

Accepted Answer

The answer of According to the utility theory, the property...

Exam 3: Risk Attitudes: Expected Utility Theory and Demand for Hedging

Optimal capital structure is a company's optimal mix of:

Under partial insurance, companies offer products with deductibles.If an individual opts for a deductible, he/she will have to:

Identify the probability that is based on a person's beliefs and experiences, and belongs to the realm of behavioral economics rather than traditional rationality-based economics.

In the utility theory, under the assumption of _____, individuals' preferences avoid any kind of circularity.

According to the utility theory, if one week of food is preferred to one week of clothing, then two weeks of food is a preferred package to one week of food.Identify this assumption on preference.

Information asymmetry problem related to hidden information is referred to as:

While utility theory deals with situations in which there is no uncertainty, this theory deals with choices individuals make when the outcomes they face are uncertain.Identify the theory.

Identify the utility function of a risk averse individual.

An individual whose preference is characterized by the increasing marginal utility would have a convex utility function.

The realm of academic study that deals with departures from E(U) maximization behavior is called behavioral economics.

In a football tournament, if University of Florida beats Ohio State, and Ohio State beats Georgia Tech, it does not mean that Florida beats Georgia Tech.This scenario violates the rationality assumption on preference of the utility theory.Identify this assumption of preference.

Identify the utility function of a risk seeking individual.

A kind of information asymmetry lies in the hidden action, wherein one party's actions are not observable by the counterparty to the contract.Economists study this issue as one of _____.

The principle-agent problem can be categorized as an information symmetry problem.Identify this information symmetry.

Which of the following statements is true companies hedging behavior?

Identify the utility that can represent the absolute level of satisfaction.

Managers can diversify risk, but owners (principals) cannot.

Utility theory is a negative theory that dictates that people should behave in the manner prescribed by it.

Identify the correct statement about corporations.

According to the utility theory, the property wherein an individual's preferences enable him or her to compare any given bundle with any other bundle is called the _____ property of preferences.