Question 1

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a

Accepted Answer

A)   dividend yield of 9%.
B)   dividend yield of 20%.
C)   dividend yield of 11%.
D)   total return of 20%.
E)   total return of 22%.F) A) and E)
G) C) and D)

Question 2

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and pay-offs are given below:
  The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the deviation of outcome A?

Accepted Answer

A)   30
B)   50
C)   75
D)   100E) None of the above
F) B) and C)

Question 3

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1
 
-Refer to Table 5.1. Expected income for the first year is

Accepted Answer

A)   highest in accounting.
B)   highest in mathematics.
C)   higher in English than in mathematics.
D)   higher in political science than in economics.
E)   highest in economics.F) All of the above
G) C) and D) E

Question 4

Donna is considering the option of becoming a co-owner in a business. Her investment choices are to hold a risk free asset that has a return of Rj and co-ownership of the business, which has a rate of return of Rb and a level of risk of σb. Donna's marginal rate of substitution of return for risk
(  
/  
) is  
=  
 where RP is Donna's portfolio rate of return and σP is her optimal portfolio risk. Donna's budget constraint is given by
RP = Rj +  
σP. Solve for Donna's optimal portfolio rate of return and risk as a function of Rj, Rb and σb. Suppose the table below lists the relevant rates of returns and risks. Use this table to determine Donna's optimal rate or return and risk.
Investment Rate of Return Risk
Risk Free 0.06 0
Business 0.25 0.39

Accepted Answer

To find Donna's optimal portfolio return...

Question 5

As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments:

The highest expected return belongs to investment

Accepted Answer

A)   A.
B)   B.
C)   C.
D)   D.E) A) and B)
F) A) and C)

Question 6

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset)  is equal to

Accepted Answer

A)   the fraction invested in the risky asset times the standard deviation of the non-risky asset.
B)   the fraction invested in the non-risky asset times the standard deviation of the risky asset.
C)   the fraction invested in the risky asset times the standard deviation of that asset.
D)   the fraction invested in the non-risky asset times the standard deviation of that asset.E) B) and D)
F) B) and C) C

Question 7

Table 5.4
 
-Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is

Accepted Answer

A)   $1.
B)   $10.
C)   $40.
D)   $50.
E)   $60.F) C) and D)
G) All of the above

Question 8

Mary is a fervent Iowa State University Cyclone Basketball fan. She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function
U(Ic, w) = 35 Ic + w, where  
= {  
and w is her level of wealth. Mary believes the probability of a Cyclone championship is 1/4. Mary has been offered the following "insurance policy." The insurance policy costs $16. If the Cyclones win the championship, she pays only the policy cost of $16. If the Cyclones lose, she will receive $21.50 (so that after taking into account the policy cost of $16, her net return is $5.50). Will Mary's expected utility increase if she purchases the policy?

Accepted Answer

If Mary does not purchase the policy, her expected utility will be: E[U(I_c, w) ] = (35 + w) + w = w + 8.75. If Mary purchases the policy, her expected utility will be: E[U(I_c, w) ] = (35 + w - 16) + (w + 5.50) = w + 8.875. Mary's expected utility with the policy is higher.

Question 9

Because of the relationship between an asset's real rate of return and its risk, one would expect to find all of the following, except one. Which one?

Accepted Answer

A)   Corporate stocks have higher rates of return than U.S. Treasury bonds.
B)   Corporate stocks have higher rates of return than U.S. Treasury bills.
C)   Corporate stocks have higher rates of return than corporate bonds.
D)   Stocks of smaller companies have higher expected rates of return than stocks of larger companies.
E)   Mutual funds including stocks of companies in politically volatile developing countries do not have as high a rate of return as mutual funds restricted to stocks of companies in developed economies.F) A) and B)
G) A) and C)

Question 10

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate)  all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Accepted Answer

A)   The portfolios were not adequately diversified because the assets were negatively correlated, so all of the assets had negative returns at the same time.
B)   The portfolios were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time.
C)   The portfolios were adequately diversified, but the assets should have been more positively correlated to protect against recession risk.
D)   The investors should not have diversified their investments to protect against recession risk.E) B) and D)
F) A) and B)

Question 11

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

Accepted Answer

A)   the insurance companies have monopoly rights issued by state regulators.
B)   the insurance companies are risk averse.
C)   there are administrative costs and other expenses that must be covered by the premia.
D)   insurance companies tend to over-state the risks they face.E) A) and B)
F) B) and C)

Question 12

The expected value of a project is always the

Accepted Answer

A)   median value of the project.
B)   modal value of the project.
C)   standard deviation of the project.
D)   weighted average of the outcomes, with probabilities of the outcomes used as weights.E) A) and C)
F) B) and C)

Question 13

What is a reference point?

Accepted Answer

A)   the value of a good on the black market
B)   the point from which an individual makes a consumption decision
C)   a subjective valuation of a good
D)   the minimum price that an individual would sell a good that she currently owns
E)   none of the aboveF) A) and B)
G) A) and C)

Question 14

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1
 
-Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in

Accepted Answer

A)   accounting.
B)   economics.
C)   English.
D)   political science.
E)   mathematics.F) A) and C)
G) A) and B)

Question 15

The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by

Accepted Answer

A)   (Rf - Rm) /σm.
B)   (Rm - Rf) /σm.
C)   Rm - Rf.
D)   b.E) C) and D)
F) A) and B)

Question 16

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

Accepted Answer

A)   is 0.
B)   is 1.
C)   is 2.
D)   is -1.
E)   cannot be determined without knowing the probabilities of each of the outcomes.F) A) and C)
G) B) and E)

Question 17

To demonstrate the anchoring phenomenon, Kahneman and Tversky would ask research subjects very difficult questions that should be answered with a number between zero and 100. Before asking for the respondent's answer, they would also spin a large wheel that generated random number outcomes from zero to 100. If the respondents were subject to the anchoring effect, then we should expect that:

Accepted Answer

A)   their responses are uncorrelated with the numbers generated by the wheel.
B)   their responses are correlated with the numbers generated by the wheel.
C)   their responses are wrong most of the time.
D)   none of the aboveE) None of the above
F) B) and D)

Question 18

The law of large numbers:

Accepted Answer

A)   can be used to explain why some people are risk averse and others are risk neutral or risk loving.
B)   can be used to explain why some people choose to self-insure against random, single and largely unpredictable events.
C)   states that large amounts of information are often preferred to small amounts of information.
D)   states that the average outcome of a large number of similar events can often be predicted.E) A) and D)
F) C) and D)

Question 19

An individual whose attitude toward risk is illustrated in Figure 5.1 is

Accepted Answer

A)   risk averse.
B)   risk loving.
C)   risk neutral.
D)   None of the above is necessarily correct.E) B) and C)
F) B) and D)

Question 20

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
 
-Refer to Scenario 5.6. The expected utility of income from research is

Accepted Answer

A)   u($275,000) .
B)   u($95,000) .
C)   [u($500,000)  + u($50,000) ]/2.
D)   .1 u($500,000)  + .9 u($50,000) .
E)   dependent on which outcome actually occurs.F) A) and E)
G) C) and D)

Exam 5: Uncertainty and Consumer Behavior

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a

Correct Answer
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Correct Answer
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Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. Expected income for the first year is

Correct Answer
verified
E

Correct Answer
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To find Donna's optimal portfolio return...
View Answer

As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments: The highest expected return belongs to investment

Correct Answer
verified

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is equal to

Correct Answer
verified
C

Table 5.4 -Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is

Correct Answer
verified

Because of the relationship between an asset's real rate of return and its risk, one would expect to find all of the following, except one. Which one?

Correct Answer
verified

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Correct Answer
verified

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

Correct Answer
verified

The expected value of a project is always the

Correct Answer
verified

What is a reference point?

Correct Answer
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Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in

Correct Answer
verified

The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by

Correct Answer
verified

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

Correct Answer
verified

Correct Answer
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The law of large numbers:

Correct Answer
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An individual whose attitude toward risk is illustrated in Figure 5.1 is

Correct Answer
verified

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The expected utility of income from research is

Correct Answer
verified

Exam 5: Uncertainty and Consumer Behavior

Last year, on advice from your sister, you bought stock in Burpsy Soda at $100/share. During the year, you collected a $2 dividend and then sold the stock for $120/share. You experienced a

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. Expected income for the first year is

Correct AnswerverifiedE

Correct AnswerverifiedTo find Donna's optimal portfolio return...View AnswerShow Answer

As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments: The highest expected return belongs to investment

Correct AnswerverifiedShow Answer

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is equal to

Correct AnswerverifiedC

Table 5.4 -Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is

Correct AnswerverifiedShow Answer

Because of the relationship between an asset's real rate of return and its risk, one would expect to find all of the following, except one. Which one?

Correct AnswerverifiedShow Answer

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Correct AnswerverifiedShow Answer

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

Correct AnswerverifiedShow Answer

The expected value of a project is always the

Correct AnswerverifiedShow Answer

What is a reference point?

Correct AnswerverifiedShow Answer

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in

Correct AnswerverifiedShow Answer

The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by

Correct AnswerverifiedShow Answer

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The law of large numbers:

Correct AnswerverifiedShow Answer

An individual whose attitude toward risk is illustrated in Figure 5.1 is

Correct AnswerverifiedShow Answer

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The expected utility of income from research is

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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E

Correct Answer
verified
To find Donna's optimal portfolio return...
View Answer

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C

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Correct Answer
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