Question 1

Figure 27-5.The figure shows a utility function for Dexter.  
-Refer to Figure 27-5.From the appearance of the utility function,we know that

Accepted Answer

A) Dexter is risk averse. 
B) Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of diminishing marginal utility does not apply to Dexter. 
D) All of the above are correct. 
A) Dexter is risk averse. 
B) Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of diminishing marginal utility does not apply to Dexter. 
D) All of the above are correct.

Question 2

Risk

Accepted Answer

A) can be reduced by placing a large number of small bets rather than a small number of large bets. 
B) can be reduced by increasing the number of stocks in a portfolio. 
C) Both A and B are correct. 
D) Neither A nor B are correct. 
A) can be reduced by placing a large number of small bets rather than a small number of large bets. 
B) can be reduced by increasing the number of stocks in a portfolio. 
C) Both A and B are correct. 
D) Neither A nor B are correct.

Question 3

Figure 27-5.The figure shows a utility function for Dexter.  
-Refer to Figure 27-5.From the appearance of the graph,we know that

Accepted Answer

A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D) None of the above answers can be inferred from the appearance of the utility function. 
A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D) None of the above answers can be inferred from the appearance of the utility function.

Question 4

Which of the following games might a risk-averse person play?

Accepted Answer

A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1 
A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

Question 5

Kurt decided to increase the number of stocks in his portfolio.In doing so,Kurt reduced

Accepted Answer

A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk,but not the market risk of his portfolio. 
C) the market risk,but not the firm-specific risk of his portfolio. 
D) neither the market risk nor the firm-specific risk of his portfolio. 
A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk,but not the market risk of his portfolio. 
C) the market risk,but not the firm-specific risk of his portfolio. 
D) neither the market risk nor the firm-specific risk of his portfolio.

Question 6

If Cara's utility falls more by losing $600 than it rises by gaining $600,she has

Accepted Answer

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

Question 7

Diversification reduces

Accepted Answer

A) only market risk. 
B) only firm-specific risk. 
C) neither market or firm-specific risk. 
D) both market and firm-specific risk. 
A) only market risk. 
B) only firm-specific risk. 
C) neither market or firm-specific risk. 
D) both market and firm-specific risk.

Question 8

John has been a sky diver for many years.When the company John works for offers its employees the option to purchase a life insurance policy,John purchases a policy.This illustrates the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) risk-return tradeoff. 
D) diversification. 
A) moral hazard. 
B) adverse selection. 
C) risk-return tradeoff. 
D) diversification.

Question 9

Rory receives,from an insurance company,a payment of $5,000 each year,and he will continue to receive these payments until he dies.This series of payments is called a(n)

Accepted Answer

A) portfolio. 
B) bond. 
C) dividend. 
D) annuity. 
A) portfolio. 
B) bond. 
C) dividend. 
D) annuity.

Question 10

Figure 27-2.The figure shows a utility function for Britney.  
-Refer to Figure 27-2.Suppose Britney begins with $1,050 in wealth.Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A) If it is "heads," she wins $100;if it is tails,she loses $95. 
B) If it is "heads," she wins $150;if it is tails,she loses $150. 
C) If it is "heads," she wins $150;if it is tails,she loses $140. 
D) She definitely would not accept any of these bets. 
A) If it is "heads," she wins $100;if it is tails,she loses $95. 
B) If it is "heads," she wins $150;if it is tails,she loses $150. 
C) If it is "heads," she wins $150;if it is tails,she loses $140. 
D) She definitely would not accept any of these bets.

Question 11

Figure 27-2.The figure shows a utility function for Britney.  
-Refer to Figure 27-2.Suppose Britney begins with $1,050 in wealth.Starting from there,

Accepted Answer

A) she would be willing to accept a coin-flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B) the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C) the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D) the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth. 
A) she would be willing to accept a coin-flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B) the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C) the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D) the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Question 12

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

Accepted Answer

A) Higher average returns come at the price of higher risk. 
B) People who are risk averse should never hold stock. 
C) Diversification cannot eliminate all of the risk in stock portfolio. 
D) None of her conclusions are incorrect. 
A) Higher average returns come at the price of higher risk. 
B) People who are risk averse should never hold stock. 
C) Diversification cannot eliminate all of the risk in stock portfolio. 
D) None of her conclusions are incorrect.

Question 13

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) if Britney owns a house,she would not consider buying fire insurance. 
B) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) All of the above are correct. 
A) if Britney owns a house,she would not consider buying fire insurance. 
B) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) All of the above are correct.

Question 14

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Accepted Answer

A) $1,160.00 
B) $1,166.40 
C) $1,168.65 
D) $1,169.64 
A) $1,160.00 
B) $1,166.40 
C) $1,168.65 
D) $1,169.64

Question 15

Which of the following actions best illustrates moral hazard?

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 16

Other things the same,as the number of stocks in a portfolio rises,

Accepted Answer

A) risk increases and the standard deviation of the return rises. 
B) risk increases and the standard deviation of the return falls. 
C) risk decreases and the standard deviation of the return rises. 
D) risk decreases and the standard deviation of the return falls. 
A) risk increases and the standard deviation of the return rises. 
B) risk increases and the standard deviation of the return falls. 
C) risk decreases and the standard deviation of the return rises. 
D) risk decreases and the standard deviation of the return falls.

Question 17

Recently,Lisa's wealth increased by $500.If her wealth were to increase by another $500 in the near future,then her utility would increase,but not by as much as it increased with the recent increase to her wealth.Based on this information,Lisa's utility function

Accepted Answer

A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping. 
A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping.

Question 18

Diversification of a portfolio

Accepted Answer

A) can eliminate market risk,but it cannot eliminate firm-specific risk. 
B) can eliminate firm-specific risk,but it cannot eliminate market risk. 
C) increases the portfolio's standard deviation. 
D) is not necessary for a person who is risk averse. 
A) can eliminate market risk,but it cannot eliminate firm-specific risk. 
B) can eliminate firm-specific risk,but it cannot eliminate market risk. 
C) increases the portfolio's standard deviation. 
D) is not necessary for a person who is risk averse.

Question 19

Figure 27-3
The following figure shows the utility function for Paul.  
-Refer to Figure 27-3.Suppose the vertical distance between the points (0,A)and (0,B)is 10.If his wealth increased from $700 to $900,then

Accepted Answer

A) Paul's utility would increase by less than 10 units. 
B) Paul's utility would increase by more than 10 units. 
C) Paul's utility would increase by exactly 10 units. 
D) Any of the above could be correct. 
A) Paul's utility would increase by less than 10 units. 
B) Paul's utility would increase by more than 10 units. 
C) Paul's utility would increase by exactly 10 units. 
D) Any of the above could be correct.

Question 20

Which of the following make(s)insurance premiums higher than otherwise?

Accepted Answer

A) adverse selection and moral hazard 
B) adverse selection,but not moral hazard 
C) moral hazard,but not adverse selection 
D) neither adverse selection nor moral hazard 
A) adverse selection and moral hazard 
B) adverse selection,but not moral hazard 
C) moral hazard,but not adverse selection 
D) neither adverse selection nor moral hazard

Exam 14: The Basic Tools of Finance: Managing Risk

Figure 27-5.The figure shows a utility function for Dexter. -Refer to Figure 27-5.From the appearance of the utility function,we know that

Risk

Figure 27-5.The figure shows a utility function for Dexter. -Refer to Figure 27-5.From the appearance of the graph,we know that

Which of the following games might a risk-averse person play?

Kurt decided to increase the number of stocks in his portfolio.In doing so,Kurt reduced

If Cara's utility falls more by losing $600 than it rises by gaining $600,she has

Diversification reduces

John has been a sky diver for many years.When the company John works for offers its employees the option to purchase a life insurance policy,John purchases a policy.This illustrates the problem of

Rory receives,from an insurance company,a payment of $5,000 each year,and he will continue to receive these payments until he dies.This series of payments is called a(n)

Figure 27-2.The figure shows a utility function for Britney. -Refer to Figure 27-2.Suppose Britney begins with $1,050 in wealth.Which of the following coin-flip bets would she definitely not be willing to accept?

Figure 27-2.The figure shows a utility function for Britney. -Refer to Figure 27-2.Suppose Britney begins with $1,050 in wealth.Starting from there,

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

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

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Which of the following actions best illustrates moral hazard?

Other things the same,as the number of stocks in a portfolio rises,

Recently,Lisa's wealth increased by $500.If her wealth were to increase by another $500 in the near future,then her utility would increase,but not by as much as it increased with the recent increase to her wealth.Based on this information,Lisa's utility function

Diversification of a portfolio

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3.Suppose the vertical distance between the points (0,A)and (0,B)is 10.If his wealth increased from $700 to $900,then

Which of the following make(s)insurance premiums higher than otherwise?

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