Question 1

Simulation techniques used in risk analysis are:&#10;A) cheap to apply&#10;B) widely used&#10;C) mostly beneficial for large projects&#10;D) limited by their inability to consider the probability distribution of the components of a project's cash flows&#10;E) all of the above

Accepted Answer

mostly beneficial for large projects&#10;

Question 2

Which of the following statements concerning marginal utility is (are) true?&#10;A) marginal utility measures the satisfaction the individual receives from a given incremental change in wealth&#10;B) marginal utility is given by the reciprocal of the slope&#10;C) a and b&#10;D) none of the above

Accepted Answer

Marginal utility measures the satisfaction or benefit gained from consuming an additional unit of a good or service, which aligns with statement A. Statement B is incorrect as marginal utility is not the reciprocal of the slope; it is the slope of the utility function itself.

Question 3

Diminishing marginal utility:&#10;A) indicates that the slope of the utility function is increasing as wealth increases&#10;B) means that, as one's wealth increases, the individual receives more additional satisfaction from each equal increment of wealth&#10;C) a and b&#10;D) none of the above

Accepted Answer

Diminishing marginal utility means that as a person consumes more of a good or service, the additional satisfaction (utility) gained from consuming an additional unit decreases, not increases as options A and B incorrectly suggest.

Question 4

For an individual having a utility function characterized by a(n) ____, the maximization of expected monetary value criterion will, in general, yield the same decisions as the maximization of expected utility criterion.

A) diminishing marginal utility for money
B) linear utility for money
C) increasing marginal utility for money
D) inverse marginal utility for money
E) converse marginal utility for money

Accepted Answer

A linear utility function for money implies that the individual values each additional unit of money equally, regardless of how much money they already have. This characteristic aligns with the maximization of expected monetary value, as both criteria would lead to the same decisions under a linear utility function. Other types of utility functions, such as those with diminishing, increasing, inverse, or converse marginal utility, imply that the value of each additional unit of money changes depending on the amount of money already obtained, which would generally lead to different decisions than those based solely on expected monetary value.

Question 5

In the riskadjusted discount rate approach, the cash flows for each project are discounted at the:&#10;A) risk-free rate&#10;B) cost of capital&#10;C) risk-adjusted discount rate&#10;D) certainty-equivalent rate&#10;E) none of the above

Accepted Answer

The risk-adjusted discount rate approach involves adjusting the discount rate according to the risk level of the cash flows. This means that the cash flows of each project are discounted at a rate that reflects their specific risk, which is the risk-adjusted discount rate.

Question 6

A(n) ____ creates the legal obligation for the buyer (seller) to purchase (sell) a commodity specified in the contract at the agreed upon price at some future point in time.&#10;A) futures contract&#10;B) forward contract&#10;C) option&#10;D) a and b only&#10;E) a, b, and c

Accepted Answer

Futures and forward contracts both create the obligation for the buyer and seller to purchase and sell a commodity at a predetermined price at a future date. Options, however, give the buyer the right but not the obligation to buy or sell at a future date.

Question 7

A ____ is a transaction that limits the risk associated with market price fluctuations for a particular investment position.&#10;A) minimax position&#10;B) maximin position&#10;C) hedge&#10;D) fence&#10;E) none of the above

Accepted Answer

A hedge is a financial strategy designed to reduce the risk of adverse price movements in an asset, effectively serving as a form of insurance against market volatility.

Question 8

The Economist Frank Knight and others sometimes make a distinction between risk and uncertainty:&#10;A) Risk involves the huge volatility, whereas uncertainty is more like a feeling of queasiness.&#10;B) Risk involves probabilities that are unknown and outcomes that are unknown, whereas uncertainty involves probabilities that are known and outcomes that are known.&#10;C) Uncertainty uses standard deviations and expected values, whereas we can compute these in situations involving risk.&#10;D) Uncertainty involves probabilities that are unknown and outcomes that are unknown, whereas risk involves probabilities that are known and outcomes that are known.

Accepted Answer

Risk involves situations where the probabilities of outcomes are known, allowing for the calculation of expected values and standard deviations. Uncertainty, on the other hand, refers to situations where the probabilities of outcomes are unknown, making it impossible to calculate expected values or standard deviations in a meaningful way.

Question 9

Consider the two following common stocks

The correlation coefficient between the returns for the two common stocks is .50. An investor plans to put 60% of his wealth in MGA common stock and 40% in MGB common stock.
(a)Determine the expected return for this portfolio.
(b)Determine the standard deviation of the portfolio's returns.

Accepted Answer

The answer of Consider the two following common stocks ...

Deck 9: Decisions Under Risk and Uncertainty