Deck 5: Uncertainty

Question 1

An option may add value to a transaction because:

A)interest charges are reduced.
B)the price of the good is reduced.
C)additional information may become available.
D)options provide buyers with monopsony power.

Answer 1

additional information may become available.

Question 2

Suppose a person's utility of wealth is given by
And his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

A)1,800
B)1,900
C)2,000
D)2,100

Answer 2

1,900

Question 3

An individual will never buy complete insurance if:

A)he or she is risk averse.
B)insurance premiums are unfair.
C)he or she is a risk taker.
D)insurance premiums are fair.

Answer 3

he or she is a risk taker.

Question 4

A risk-averse individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

A)definitely take the gamble.
B)definitely not take the gamble.
C)definitely take the gamble if his or her income is high enough.
D)take an action that cannot be determined given the information available.

Question 5

An individual whose utility function is given by
​(where W_i is wealth in state i)will:

A)never gamble no matter how favorable the odds.
B)only gamble if the expected value of the bet is positive.
C)gamble if the bet is not too unfair.
D)always gamble,no matter how unfavorable the odds.

Question 6

People who always choose not to participate in fair games are called:

A)risk takers.
B)risk averse.
C)risk neutral.
D)broke.

Question 7

Which of the following utility functions would indicate the most (relative)risk-averse behavior?

A)
B)
C)
D)

Question 8

If a fair game is played many times the monetary losses or gains will:

A)approach zero.
B)be negative.
C)be positive.
D)result in an outcome that cannot be determined without more information.

Question 9

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:​

A)​definitely take the gamble.
B)​definitely not take the gamble.
C)​definitely take the gamble if his or her income is high enough.
D)​take an action that cannot be determined given the information available.

Question 10

Risk-averse individuals will diversify their investments because this will:

A)increase their expected returns.
B)provide them with some much-needed variety.
C)reduce the variability of their returns.
D)reduce their transaction costs.

Question 11

The formula for the Pratt measure of risk aversion is:​

A)​
B)​
C)​
D)​

Question 12

Risk aversion is best explained by:

A)timidness.
B)increasing marginal utility of wealth.
C)constant marginal utility of wealth.
D)decreasing marginal utility of wealth.

Question 13

The expected value of a random variable is:

A)the measure of its variability.
B)the most likely outcome.
C)the outcome that will occur on average.
D)the relative frequency of a realization.

Question 14

Which of the following utility functions exhibits constant absolute risk aversion?

A)
B)
C)
D)

Question 15

The condition for optimal portfolio choice can be represented by:

A)
B)
C)
D)

Question 16

Which of the following utility functions exhibits constant relative risk aversion?

A)
B)
C)
D)

Question 17

More risk-averse people will:

A)hold fewer risky assets because marginal utility is rapidly diminishing.
B)hold fewer risky assets because marginal utility is greater.
C)hold fewer risky assets because rates of return are more uncertain.
D)hold fewer risky assets because marginal utility is negative.

Question 18

What property of the von-Neumann Morgenstern utility function is related to risk aversion?​

A)​Its upward slope
B)​Its downward slope
C)​Its convexity
D)​Its concavity

Question 19

Faced with an uncertain situation,the best decision for a person obeying the von-Neumann Morgenstern axioms:​

A)​minimizes loss relative to the status quo.
B)​minimizes variability across possible outcomes.
C)​maximizes the expected payoff.
D)​maximizes expected utility.