Deck 27: 2: Sec 272 Mc Managing Risk

Question 1

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.What is measured along the vertical axis?

A)risk aversion
B)marginal utility
C)utility
D)the number of units of a good that can be purchased

Answer 1

C

Question 2

Matt's Utility Function
Wealth
Utility
$50,000
7000
51,000
7250
52,000
7499
53,000
7746
If Matt's current wealth is $51,000,then

A)his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000.Matt is risk averse.
B)his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000.Matt is not risk averse.
C)his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000.Matt is risk averse.
D)his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000.Matt is not risk averse.

Answer 2

D

Question 3

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

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.

Answer 3

D

Question 4

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

A)the distance between the origin and point B
B)the distance between the origin and point C
C)the distance between point A and point C
D)the distance between point B and point C

Question 5

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.The properties exhibited by this utility function help to explain various things we observe in the economy,including

A)the risk-return tradeoff.
B)insurance.
C)diversification.
D)All of the above are correct.

Question 6

David's Utility Function
Wealth
Utility
$60,000
500
$61,000
505
$62,000
509
$63,000
512)5
If David's current wealth is $61,000,then

A)his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000.David is risk averse.
B)his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000.David is not risk averse.
C)his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000.David is risk averse.
D)his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000.David is not risk averse.

Question 7

Risk aversion helps to explain various things we observe in the economy,including

A)adherence to the old adage,"Don't put all your eggs in one basket."
B)insurance.
C)the risk-return trade-off.
D)All of the above are correct.

Question 8

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,

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 9

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

A)she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails."
B)the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth.
C)the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth.
D)the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.

Question 10

Risk aversion helps to explain various things we observe in the economy,including

A)adherence to the old adage,"Don't put all your eggs in one basket."
B)insurance.
C)the risk-return trade-off.
D)All of the above are correct.

Question 11

If Joanna is risk averse,then

A)her utility function exhibits the property of decreasing utility.
B)her utility function exhibits the property of increasing marginal utility.
C)she dislikes bad things more than she likes comparable good things.
D)she is unlike most people,because most people are not risk averse.

Question 12

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

A)Britney is risk averse.
B)Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C)the property of increasing marginal utility applies to Britney.
D)All of the above are correct.

Question 13

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.Let 0A represent the distance between the origin and point A;let AB represent the distance between point A and point B;etc.Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

A)
B)
C)
D)

Question 14

For a risk averse person,

A)the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
B)the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
C)the utility function exhibits the property of increasing marginal utility.
D)the utility function gets steeper as wealth increases.

Question 15

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.The utility function that is shown exhibits the property of diminishing

A)wealth.
B)utility.
C)marginal wealth.
D)marginal utility.

Question 16

Economists have developed models of risk aversion using the concept of

A)utility and the associated assumption of diminishing marginal utility.
B)utility and the associated assumption of increasing marginal utility.
C)income and the associated assumption of diminishing marginal wealth.
D)income and the associated assumption of increasing marginal wealth.

Question 17

Figure 27-2.The figure shows a utility function for Britney.
Refer to Figure 27-2.Suppose the vertical distance between the points (0,A)and (0,B)is 5.If her wealth increased from $1,050 to $1,350,then

A)Britney's subjective measure of her well-being would increase by less than 5 units.
B)Britney's subjective measure of her well-being would increase by more than 5 units.
C)Britney would change from being a risk-averse person into a person who is not risk averse.
D)Britney would change from being a person who is not risk averse into a risk-averse person.

Question 18

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

A)Britney is risk averse.
B)Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C)the property of diminishing marginal utility applies to Britney.
D)All of the above are correct.

Question 19

Figure 27-1.The figure shows a utility function.
Refer to Figure 27-1.For the person to whom this utility function applies,

A)the more wealth she has,the less utility she gets from an additional dollar of wealth.
B)the more wealth she has,the more utility she gets from an additional dollar of wealth.
C)her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D)her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Question 20

Diminishing marginal utility of wealth implies that the utility function

A)has increasing slope and a person is risk averse.
B)has increasing slope and a person is not risk averse.
C)has decreasing slope and a person is risk averse
D)has decreasing slope and a person is not risk averse.

Question 21

Figure 27-4.The figure shows a utility function for Alex.
Refer to Figure 27-4.From the appearance of Alex's utility function,we know that

A)if Alex owns a house,then he definitely would buy fire insurance provided the cost of the insurance was reasonable.
B)Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk.
C)Alex is risk averse.
D)Alex is not risk averse.

Question 22

Figure 27-4.The figure shows a utility function for Alex.
Refer to Figure 27-4.From the appearance of Alex's utility function,we know that

A)the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth.
B)the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth.
C)the property of increasing utility does not apply to Alex.
D)the property of diminishing marginal utility does not apply to Alex.

Question 23

From the standpoint of the economy as a whole,the role of insurance is

A)to entice risk-loving people to become risk averse.
B)to promote the phenomenon of adverse selection.
C)not to eliminate the risks inherent in life,but to spread them around more efficiently.
D)not to spread risks,but to eliminate them for individual policy holders.

Question 24

Mary Beth is risk averse and has $1,000 with which to make a financial investment.She has three options.Option A is a risk-free government bond that pays 5 percent interest each year for two years.Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years.Option C is a high-risk stock that is expected to be worth about $1,200 in four years.Mary Beth should choose

A)option A.
B)option B.
C)option C.
D)either A or B because they are the same to her.

Question 25

The problem of moral hazard arises because

A)life is full of all sorts of risks.
B)after people buy insurance,they have less incentive to be careful about their risky behavior.
C)a high-risk person is more likely to apply for insurance than is a low-risk person.
D)insurance companies go to great effort to avoid paying claims to their policy holders.

Question 26

Figure 27-5.The figure shows a utility function for Dexter.
Refer to Figure 27-5.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then

A)Dexter's subjective measure of his well-being would increase by less than 12 units.
B)Dexter's subjective measure of his well-being would increase by more than 12 units.
C)Dexter would change from being a risk-averse person into a person who is not risk averse.
D)Dexter would forgo the insurance he bought when his wealth was $1,300.

Question 27

Figure 27-5.The figure shows a utility function for Dexter.
Refer to Figure 27-5.Suppose Dexter begins with $1,300 in wealth.Starting from there,

A)the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B)the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C)the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D)This cannot be determined from the graph.

Question 28

Figure 27-5.The figure shows a utility function for Dexter.
Refer to Figure 27-5.In what way(s)does the graph differ from the usual case?

A)The utility function shown here is upward-sloping,whereas in the usual case the utility function is downward-sloping.
B)The utility function shown here is bowed downward (convex),whereas in the usual case the utility function is bowed upward (concave).
C)On the graph shown here,wealth is measured along the horizontal axis,whereas in the usual case saving is measured along the horizontal axis.
D)On the graph shown here,utility is measured along the vertical axis,whereas in the usual case satisfaction is measured along the vertical axis.

Question 29

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

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 30

A risk-averse person

A)has a utility curve where the slope increases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300.
B)has a utility curve where the slope increases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.
C)has a utility curve where the slope decreases with wealth,and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300.
D)has a utility curve where the slope decreases with wealth,and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

Question 31

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?

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 32

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

A)Dexter is risk averse.
B)Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)the property of decreasing marginal utility applies to Dexter.
D)All of the above are correct.

Question 33

A measure of the volatility of a variable is its

A)present value.
B)future value.
C)return.
D)standard deviation.

Question 34

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

A)80 to 100.
B)40 to 80.
C)10 to 20.
D)1 to 10.

Question 35

Figure 27-4.The figure shows a utility function for Alex.
Refer to Figure 27-4.If most people's utility functions look like Alex's utility function,then it is easy to explain why

A)people buy various types of insurance.
B)we observe a trade-off between risk and return.
C)most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets.
D)None of the above are correct.

Question 36

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

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 37

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

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 38

Figure 27-3
The following figure shows the utility function for Paul.
Refer to Figure 27-3.Suppose Paul begins with $900 in wealth.Starting from there,

A)Paul would be willing to accept a coin-flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails."
B)the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth.
C)the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth.
D)the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

Question 39

Diversification of a portfolio

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 40

As the number of stocks in a person's portfolio increases,

A)the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio.
B)the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio.
C)the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio.
D)the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio.

Question 41

Given that Tamar is a risk-averse person,she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

A)chance of winning $120 in two years and the interest rate was 11%.
B)chance of winning $114 in two years and the interest rate was 7%.
C)chance of winning $110 in two years and the interest rate was 3%.
D)None of the above are correct;a risk averse person would not accept any of the above bets.

Question 42

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

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

Question 43

If a person is risk averse,then she has

A)diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases.
B)diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.
C)increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases.
D)increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.

Question 44

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

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 45

If Alan is risk-averse,then he will always

A)choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.
B)choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5.
C)choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5.
D)All of the above are correct.

Question 46

Which of the following actions best illustrates adverse selection?

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 47

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

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 48

The utility function of a risk-averse person has a

A)positive slope and gets steeper as wealth increases.
B)positive slope but gets flatter as wealth increases.
C)negative slope but gets steeper as wealth increases.
D)negative slope and gets flatter as wealth increases.

Question 49

Risk

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 50

Svetlana is risk averse.Which of the following is correct about Svetlana?

A)Her marginal utility of wealth increases as her income increases.
B)She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar.
C)Her utility function is a straight line.
D)None of the above are correct.

Question 51

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)

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

Question 52

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

A)a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1
B)a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100
C)a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1
D)All of the above are correct.

Question 53

In effect,an annuity provides insurance

A)against the risk of dying and leaving one's family without a regular income.
B)against the risk of living too long.
C)to people who are not risk-averse.
D)to people whose utility functions do not display the usual properties.

Question 54

Which of the following defines an annuity?

A)For a fee,an insurance company provides you with regular income until you die.
B)A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C)Annuity is another name for stock funds managed by mutual fund managers.
D)Annuity is another name for any diversified portfolio.

Question 55

Which of the following actions best illustrates moral hazard?

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 56

Diminishing marginal utility of wealth implies that the utility function is

A)upward-sloping and has decreasing slope.
B)upward-sloping and has increasing slope.
C)downward-sloping and has decreasing slope.
D)downward-sloping and has increasing slope.

Question 57

If a person is risk averse,then as wealth increases,total utility of wealth

A)increases at an increasing rate.
B)increases at a decreasing rate.
C)decreases at an increasing rate.
D)decreases at a decreasing rate.

Question 58

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

A)marginal utility diminishes as wealth rises,so he must be risk averse.
B)marginal utility diminishes as wealth rises,but we can't tell from this if he is risk averse.
C)marginal utility increases as wealth rises,so he must be risk averse.
D)marginal utility increases as wealth rises,but we can't tell from this if he is risk averse.

Question 59

A risk-averse person has

A)utility and marginal utility curves that slope upward.
B)utility and marginal utility curves that slope downward.
C)a utility curve that slopes down and a marginal utility curve that slopes upward.
D)a utility curve that slopes upward and a marginal utility curve that slopes downward.

Question 60

Which of the following is correct concerning a risk-averse person?

A)She would not play games where the probability of winning and losing a dollar are the same.
B)She might not buy health insurance if she thinks her risks are low.
C)Her marginal utility of wealth decreases as her income increases.
D)All of the above are correct.

Question 61

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

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 62

Over the past two centuries,the average annual rates of return were about

A)5 percent for stocks and about 1.5 percent for short-term government bonds.
B)6 percent for stocks and about 2.5 percent for short-term government bonds.
C)8 percent for stocks and about 3 percent for short-term government bonds.
D)None of the above is correct.

Question 63

Shawn determines that if Lexall Corporation has high revenues,then Waters Corporation will have low revenues,and that if Lexall Corporation has low revenues,then Waters Corporation will have high revenues.Shawn buys stock in both corporations.

A)He has reduced firm-specific risk but not market risk.
B)He has reduced market risk,but not firm-specific risk.
C)He had reduce both firm-specific risk and market risk.
D)He has reduced neither firm-specific risk nor market risk.

Question 64

Figure 27-6.On the graph,x represents risk and y represents return.
Refer to Figure 27-6.Which of the following statements is correct?

A)At point A the standard deviation of the portfolio is 3.
B)A risk averse person always will choose to be at point A.
C)At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets.
D)The figure shows that the greater the risk,the greater the return.

Question 65

Which of the following is not correct?

A)The higher average return on stocks than on bonds comes at the price of higher risk.
B)Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.
C)Insurance markets reduce risk,but not by diversification.
D)Risk can be reduced by placing a large number of small bets,rather than a small number of large bets.

Question 66

Chloe talked to several stockbrokers and made the following conclusions.Which,if any,of Chloe's conclusions are correct?

A)It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)Stock prices,even if not exactly a random walk,are very close to it.
C)Some people have made a lot of money in the stock market by using insider information,but these cases are not contrary to the efficient markets hypothesis.
D)All of Chloe's conclusions are correct.

Question 67

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

A)The insurance requirement and the credit check are both designed primarily to reduce adverse selection.
B)The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.
C)The insurance requirement is designed primarily to reduce adverse selection;the credit check is designed primarily to reduce the risk of moral hazard.
D)The insurance requirement is designed primarily to reduce the risk of moral hazard;the credit check is designed primarily to reduce adverse selection.

Question 68

Amanda talks with several different brokers at a social gathering.She hears the following advice from brokers A,B,and C.Which broker,if any,gave her incorrect advice?

A)Broker A: "There are risks in holding stocks,even in a highly diversified portfolio."
B)Broker B: "Portfolios with smaller standard deviations have lower risk."
C)Broker C: "Stocks with greater risks offer lower average returns."
D)They all gave her correct advice.

Question 69

Figure 27-6.On the graph,x represents risk and y represents return.
Refer to Figure 27-6.Point A represents a situation in which

A)all of a person's savings are allocated to a class of safe assets.
B)the person knows with certainty that his or her return will be 3 percent.
C)the standard deviation of the person's portfolio is zero.
D)All of the above are correct.

Question 70

Which of the following best illustrates moral hazard?

A)After a person obtains life insurance,she takes up skydiving.
B)A person obtains insurance knowing he is in poor health.
C)A person holds stock only in very risky corporations.
D)A person holds stocks from only a few corporations.

Question 71

Which of the following is a source of market risk?

A)Holding stocks in many companies carries the risk of a reduced average return.
B)Real GDP varies over time and sales and profits move with real GDP.
C)When a paper producer has declining sales,it is likely that so will other paper producers.
D)If stockholders become aggravated with the way a CEO runs a company,the price of that company's stock might fall in the stock market.

Question 72

Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

A)risk increases at an increasing rate.
B)risk increases at a decreasing rate.
C)risk decreases at an increasing rate.
D)risk decreases at a decreasing rate.

Question 73

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Abby

A)and the example with Brad illustrate adverse selection.
B)and the example with Brad illustrate moral hazard.
C)illustrates adverse selection;the example with Brad illustrates moral hazard.
D)illustrates moral hazard;the example with Brad illustrates adverse selection.

Question 74

Diversification reduces

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

Question 75

There are many concerns for risk-averse lenders.Consider the following: 1.Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans.2.Lenders are concerned that real GDP will decline leading to reduced corporate profits.3.Lenders are concerned that products produced by certain corporations will become obsolete.

A)1 is market risk;2 is firm-specific risk
B)2 is market risk;3 is firm-specific risk
C)3 is market risk;1 is firm-specific risk
D)2 is firm-specific risk;3 is market risk

Question 76

Which of the following is adverse selection?

A)the risk associated with selecting stocks in only a few specific companies
B)the risk that a person will become overconfident in his ability to select stocks
C)a high-risk person being more likely to apply for insurance
D)after obtaining insurance a person having less incentive to be careful

Question 77

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

A)every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B)every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C)the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D)the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

Question 78

Tami knows that people in her family die young,and so she buys life insurance.Preston knows he is a reckless driver and so he applies for automobile insurance.

A)These are both examples of adverse selection.
B)These are both examples of moral hazard.
C)The first example illustrates adverse selection,and the second illustrates moral hazard.
D)The first example illustrates moral hazard,and the second illustrates adverse selection.

Question 79

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you would use on your own car.

A)Both examples primarily illustrate adverse selection.
B)Both examples primarily illustrate moral hazard.
C)The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard.
D)The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection.

Question 80

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

A)market risk.
B)moral hazard.
C)adverse selection.
D)risk aversion.