Question 1

Use the following to answer questions below:
 
-Graphs of utility of income represent four different individuals. Which of them would reflect the attitude of an individual who is risk averse at all levels of income?
A) Individual A
B) Individual B
C) Individual C
D) Individual D

Accepted Answer

Individual C's graph would show a concave curve, indicating diminishing marginal utility of income, which is characteristic of risk aversion at all levels of income. This means that as income increases, the additional satisfaction (utility) gained from each additional unit of income decreases, reflecting a preference for certainty over risk.

Question 2

Use the following to answer questions below:
 
-Refer to the total utility graphs. Which graph would reflect the attitude of an individual who is risk neutral at all levels of income?
A) Individual A
B) Individual B
C) Individual C
D) Individual D

Accepted Answer

B

Question 3

Use the following to answer questions below:
 
-Refer to the total utility graphs. Which graph would reflect the attitude of an individual who is a risk seeker at all levels of income?
A) Individual A
B) Individual B
C) Individual C
D) Individual D

Accepted Answer

Individual A is a risk seeker at all levels of income because their total utility graph is always increasing, even as the probability of winning decreases.

Question 4

Use the following to answer questions below:
 
-Refer to the total utility graphs. Which graph would reflect the attitude of an individual who might purchase insurance and gamble?
A) Individual A
B) Individual B
C) Individual C
D) Individual D

Accepted Answer

The answer of Use the following to answer questions below:
...

Question 5

An investment opportunity will pay $50 with a 10 percent probability and $20 with a 40 percent probability, and will result in a loss of $20 with a 50 percent probability. What is the expected value of the investment?
A) $3
B) $13
C) $23
D) None of the above is correct.

Accepted Answer

The expected value (EV) of an investment is calculated by multiplying each outcome by its probability and summing those values. For this investment, EV = (0.10 * $50) + (0.40 * $20) - (0.50 * $20) = $5 + $8 - $10 = $3.

Question 6

An investment opportunity will pay $10 with a 20 percent probability, $20 with a 40 percent probability, $30 with a 30 percent probability, and $40 with a 10 percent probability. What is the standard deviation of the investment?
A) 3
B) 9
C) 81
D) None of the above is correct.

Accepted Answer

The expected value is $21. The variance is calculated as the sum of the squared differences from the expected value, weighted by their probabilities: (0.2*(10-21)^2 + 0.4*(20-21)^2 + 0.3*(30-21)^2 + 0.1*(40-21)^2) = 81. The standard deviation is the square root of the variance, which is 9.

Question 7

An investment opportunity will pay $1 with a 20 percent probability, $2 with a 50 percent probability, and $6 with a 30 percent probability. What is the coefficient of variation of the investment?
A) 4/3
B) 3/4
C) 2/3
D) None of the above is correct.

Accepted Answer

The answer of An investment opportunity will pay $1 with...

Question 8

Investment A has an expected value of 5 and a standard deviation of 2. Investment B has an expected value of 10 and a standard deviation of 5. Using the coefficient of variation approach to comparing these two investments,
A) Investment A would be selected because it has the larger coefficient of variation.
B) Investment B would be selected because it has the larger coefficient of variation.
C) Investment A would be selected because it has the smaller coefficient of variation.
D) Investment B would be selected because it has the smaller coefficient of variation.

Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation divided by the expected value. For Investment A, CV = 2 / 5 = 0.4. For Investment B, CV = 5 / 10 = 0.5. Investment A has the smaller coefficient of variation, indicating it offers a better risk-reward ratio, hence it would be selected.

Question 9

The strategy selected on the basis of maximizing expected monetary value is the same as that selected on the basis of maximizing expected utility if
A) an individual is risk averse.
B) an individual is risk neutral.
C) an individual is risk seeking.
D) None of the above is necessarily correct.

Accepted Answer

Maximizing expected monetary value and maximizing expected utility lead to the same decision when an individual is risk neutral. This is because a risk-neutral person values potential outcomes based solely on their monetary value, without adjusting for risk, which aligns with the concept of expected monetary value.

Question 10

An individual is indifferent between a certain payment of $8 and a game that will pay $20 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of
A) 0.40.
B) 0.50.
C) 0.80.
D) 1.25.

Accepted Answer

The certainty equivalent coefficient is calculated as the certain amount ($8) divided by the expected value of the uncertain game. The expected value of the game is (0.5 * $20) + (0.5 * $0) = $10. Therefore, the certainty equivalent coefficient is $8 / $10 = 0.80.

Question 11

An individual is indifferent between a certain payment of $20 and a game that will pay $50 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of
A) 0.20.
B) 0.40.
C) 0.80.
D) 2.50.

Accepted Answer

The certainty equivalent coefficient is calculated as the certain amount ($20) divided by the expected value of the uncertain outcome. The expected value of the game is (0.5 * $50) + (0.5 * $0) = $25. Therefore, the certainty equivalent coefficient is $20 / $25 = 0.80.

Question 12

An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?
A) $16
B) $32
C) $40
D) $100

Accepted Answer

The expected value of the game is (0.5 * $50) + (0.5 * $30) = $40. The certainty equivalent is 0.40 * $40 = $16, which is the most the individual would pay to play the game.

Question 13

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is successful and a $10 loss if the business fails. Apply the maximin and minimax regret criteria to this decision.
A) Maximin: Do not invest. Minimax regret: Do not invest.
B) Maximin: Do not invest. Minimax regret: Invest.
C) Maximin: Invest. Minimax regret: Do not invest.
D) Maximin: Invest. Minimax regret: Invest.

Accepted Answer

Maximin criterion suggests choosing the option with the best worst-case scenario, which is not investing (0 loss). Minimax regret involves minimizing the maximum regret, which suggests investing to avoid the regret of missing out on a $20 profit.

Question 14

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is very successful and a $10 profit if the business is not very successful. Apply the maximin and minimax regret criteria to this decision.
A) Maximin: Do not invest. Minimax regret: Do not invest.
B) Maximin: Do not invest. Minimax regret: Invest.
C) Maximin: Invest. Minimax regret: Do not invest.
D) Maximin: Invest. Minimax regret: Invest.

Accepted Answer

Maximin criterion suggests choosing the action with the best of the worst possible outcomes. Here, the worst outcome of investing is better than not investing (since the lowest profit from investing is $10, which is better than $0 from not investing). Minimax regret involves minimizing the maximum regret you might feel. Investing has a potential regret of $0 (if the business is successful), which is less than the regret of not investing if the business would have been successful.

Question 15

An individual must choose between two business opportunities. If he invests in A, then he will get a $20 profit if the economy is expanding and an $8 loss otherwise. If he invests in B, then he will get a $10 profit if the economy is expanding and break even otherwise. Apply the maximin and minimax regret criteria to this decision.
A) Maximin: Invest in A. Minimax regret: Invest in B.
B) Maximin: Invest in B. Minimax regret: Invest in B.
C) Maximin: Invest in A. Minimax regret: Invest in A.
D) Maximin: Invest in B. Minimax regret: Invest in A.

Accepted Answer

The answer of An individual must choose between two business...

Question 16

A situation in which a decision maker knows all of the possible outcomes of a decision and also knows the probability associated with each outcome is referred to as
A) certainty.
B) risk.
C) uncertainty.
D) strategy.

Accepted Answer

Risk is the correct answer because it describes a situation where the outcomes and their probabilities are known, allowing for decision-making under conditions where there is a known likelihood of various outcomes.

Question 17

Which of the following methods of selecting a strategy is consistent with risk-averting behavior?
A) If two strategies have the same expected profit, select the one with the smaller standard deviation.
B) If two strategies have the same standard deviation, select the one with the smaller expected profit.
C) Select the strategy with the larger coefficient of variation.
D) All of the above are correct.

Accepted Answer

A risk-averting individual prefers to choose an option with less uncertainty if the expected outcomes are the same. Therefore, among strategies with the same expected profit, choosing the one with a smaller standard deviation indicates a preference for less risk, consistent with risk-averting behavior.

Question 18

Which one of the following does not measure risk?
A) Coefficient of variation
B) Standard deviation
C) Expected value
D) All of the above are measures of risk.

Accepted Answer

The expected value is a measure of the central tendency of a probability distribution and does not directly measure risk. In contrast, both the coefficient of variation and standard deviation are used to assess the variability or dispersion of a set of data points, which is directly related to the concept of risk.

Question 19

If a person's utility doubles when his or her income doubles, then that person is risk
A) averse.
B) neutral.
C) seeking.
D) There is not enough information given in the question to determine an answer.

Accepted Answer

Doubling of utility with the doubling of income indicates a linear relationship between utility and income, which is characteristic of risk neutrality. Risk-neutral individuals value potential outcomes based on their expected values, without extra weight given to the risk involved.

Question 20

Strategy A has an expected value of 10 and a standard deviation of 3. Strategy B has an expected value of 10 and a standard deviation of 5. Strategy C has an expected value of 15 and a standard deviation of 10. Which one of the following statements is true?
A) A risk-averse decision maker will always prefer A to B, but may prefer C to A.
B) A risk-neutral decision maker will always prefer C to A or B.
C) A risk-seeking decision maker will always prefer C to A or B.
D) All of the above are correct.

Accepted Answer

A risk-averse decision maker prefers lower risk for the same expected value, hence would prefer A (lower standard deviation) over B but might consider C for its higher expected value despite higher risk. A risk-neutral decision maker focuses solely on expected value, thus preferring C for its highest expected value. A risk-seeking decision maker prefers higher risk for potentially higher rewards, thus would also prefer C. Therefore, all statements are correct.

Quiz 14: Risk Analysis

Use the following to answer questions below: -Graphs of utility of income represent four different individuals. Which of them would reflect the attitude of an individual who is risk averse at all levels of income?

Use the following to answer questions below: -Refer to the total utility graphs. Which graph would reflect the attitude of an individual who is risk neutral at all levels of income?

Use the following to answer questions below: -Refer to the total utility graphs. Which graph would reflect the attitude of an individual who is a risk seeker at all levels of income?

Use the following to answer questions below: -Refer to the total utility graphs. Which graph would reflect the attitude of an individual who might purchase insurance and gamble?

An investment opportunity will pay $50 with a 10 percent probability and $20 with a 40 percent probability, and will result in a loss of $20 with a 50 percent probability. What is the expected value of the investment?

An investment opportunity will pay $10 with a 20 percent probability, $20 with a 40 percent probability, $30 with a 30 percent probability, and $40 with a 10 percent probability. What is the standard deviation of the investment?

An investment opportunity will pay $1 with a 20 percent probability, $2 with a 50 percent probability, and $6 with a 30 percent probability. What is the coefficient of variation of the investment?

Investment A has an expected value of 5 and a standard deviation of 2. Investment B has an expected value of 10 and a standard deviation of 5. Using the coefficient of variation approach to comparing these two investments,

The strategy selected on the basis of maximizing expected monetary value is the same as that selected on the basis of maximizing expected utility if

An individual is indifferent between a certain payment of $8 and a game that will pay $20 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of

An individual is indifferent between a certain payment of $20 and a game that will pay $50 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of

An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is successful and a $10 loss if the business fails. Apply the maximin and minimax regret criteria to this decision.

An individual must decide whether or not to pursue a business opportunity. If he does pursue the opportunity, then he will get a $20 profit if the business is very successful and a $10 profit if the business is not very successful. Apply the maximin and minimax regret criteria to this decision.

A situation in which a decision maker knows all of the possible outcomes of a decision and also knows the probability associated with each outcome is referred to as

Which of the following methods of selecting a strategy is consistent with risk-averting behavior?

Which one of the following does not measure risk?

If a person's utility doubles when his or her income doubles, then that person is risk

Strategy A has an expected value of 10 and a standard deviation of 3. Strategy B has an expected value of 10 and a standard deviation of 5. Strategy C has an expected value of 15 and a standard deviation of 10. Which one of the following statements is true?