Question 1

Taking actions that reduce risk

Accepted Answer

A)  raise your expected value. 
B)  makes you less risk-averse. 
C)  are impractical in most circumstances. 
D)  change your utility function.

Question 2

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following losses to an individual would an insurance company NOT cover?

Accepted Answer

A)  The person's automobile is stolen. 
B)  Fire destroys the person's home. 
C)  The person's father dies. 
D)  The person's country is invaded.

Question 4

A(n)________ relates each possible outcome to its probability of occurrence.

Accepted Answer

A)  probability distribution 
B)  frequency 
C)  expected value 
D)  coin toss

Question 5

Explain why insurance companies usually do not offer earthquake insurance.

Accepted Answer

The answer of Explain why insurance companies usually do not...

Question 6

For a given expected value,the smaller the standard deviation of the expected value,the larger the risk.

Accepted Answer

A) True 
 B)False

Question 7

If an individual makes her investment decisions based solely on the Expected Value criterion,one can conclude that she is

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  extremely wealthy.

Question 8

From the expected value of a game,we

Accepted Answer

A)  cannot determine the risk. 
B)  can determine the risk. 
C)  can determine exactly how much a player will receive. 
D)  can infer the subjective probabilities of each possible outcome.

Question 9

After Hurricane Katrina,there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage.What might explain these different approaches to insurance?

Accepted Answer

A)  The risk of wind damage is potentially diversifiable but the risk of flooding is not. 
B)  The risk of flood damage is potentially diversifiable but the risk of wind damage is not. 
C)  predatory insurance policies 
D)  Neither the risk of wind damage or the risk of flooding is diversifiable.

Question 10

If Stock A increases in value when Stock B decreases in value at the same time,they are

Accepted Answer

A)  negatively correlated. 
B)  uncorrelated. 
C)  positively correlated. 
D)  in different industries.

Question 11

A risk-neutral individual will make investment decisions purely based on expected value because

Accepted Answer

A)  she doesn't care about utility. 
B)  utility is a linear function of wealth. 
C)  she loves to take risk. 
D)  expected value is always more than expected utility.

Question 12

If there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

Accepted Answer

A)  0. 
B)  .001. 
C)  .0001. 
D)  1,000.

Question 13

Which of the following games involving the roll of a single die is a fair bet?

Accepted Answer

A)  Bet $1 and receive $1 if 3 or 4 comes up. 
B)  Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C)  Bet $1 and receive $4 if 6 comes up. 
D)  None of the bets is a fair bet.

Question 14

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game.This is an example of a(n)

Accepted Answer

A)  objective probability. 
B)  subjective probability. 
C)  risk-averse statement. 
D)  of Friedman-Savage preferences.

Question 15

Natasha is going to buy a risky asset that has an expected value of $62,which yields an expected utility of 146.Equivalently,she could get utility of 146 from a certainty equivalent of $43.What is Natasha's risk premium?

Accepted Answer

A)  $19 
B)  $43 
C)  $103 
D)  $105

Question 16

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Accepted Answer

A)  The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B)  The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C)  The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D)  The weather in far-flung geographic areas are commonly positively correlated.

Question 17

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's

Accepted Answer

A)  risk premium. 
B)  expected utility of receiving $50 with certainty. 
C)  expected utility of receiving $0 50% of the time and $100 50% of the time. 
D)  risk neutrality.

Question 18

You draw colored balls out of a bag.You draw a red ball 30% of the time and a blue ball 70% of the time.For each draw,the blue outcome and the red outcome are

Accepted Answer

A)  mutually exclusive. 
B)  exhaustive. 
C)  Both A and B. 
D)  None of the above.

Question 19

Many people do not fully insure against risk because

Accepted Answer

A)  they are risk averse. 
B)  the insurance companies are all crooks. 
C)  the insurance offered is less than fair. 
D)  the insurance offered is more than fair.

Question 20

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Accepted Answer

A)  $30 
B)  $50 
C)  $70 
D)  $75

Exam 14: Managerial Decision-Making Under Uncertainty