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Question Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho
company. If it is a rainy year and he invests only in the sunglass company, he
expects to lose $5,000 at the end of the year. However, if it is a rainy year and he
invests only in the rain poncho company, he expects to earn $10,000. If it is a
sunny year and he invests only in the sunglass company, he expects to earn
$10,000 at the end of the year; if he invests only in the rain poncho company, he
expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year
and a 50% chance of a rainy year.
Reference: Ref 20-13
(Scenario: Diversification) Based on the information in the scenario Diversification, if
Morris invests all of his money in the rain poncho company, what is his expected
gain or loss?
123. Multiple Choice: Scenario: DiversificationMorris is c...
Question Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho
company. If it is a rainy year and he invests only in the sunglass company, he
expects to lose $5,000 at the end of the year. However, if it is a rainy year and he
invests only in the rain poncho company, he expects to earn $10,000. If it is a
sunny year and he invests only in the sunglass company, he expects to earn
$10,000 at the end of the year; if he invests only in the rain poncho company, he
expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year
and a 50% chance of a rainy year.
Reference: Ref 20-13
(Scenario: Diversification) Based on the information in the scenario Diversification, if
Morris invests half of his money in the sunglass company and half in the rain
poncho company, what is his expected gain or loss?
Points: 0
124. Multiple Choice: Scenario: DiversificationMorris is c...
Question Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho
company. If it is a rainy year and he invests only in the sunglass company, he
expects to lose $5,000 at the end of the year. However, if it is a rainy year and he
invests only in the rain poncho company, he expects to earn $10,000. If it is a
sunny year and he invests only in the sunglass company, he expects to earn
$10,000 at the end of the year; if he invests only in the rain poncho company, he
expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year
and a 50% chance of a rainy year.
Reference: Ref 20-13
(Scenario: Diversification) Based on the information in the scenario Diversification, if
Morris invests half of his money in the sunglass company and half in the rain
poncho company, he will earn ________ if it is a sunny year and ________ if it is a
rainy year.
125. Multiple Choice: If an insurance company insured 100,0...
Question If an insurance company insured 100,000 cars across the state against theft, which
of the following would not be true?
126. Multiple Choice: An individual can almost eliminate ri...
Question An individual can almost eliminate risk by taking a small share in many
independent events or by taking advantage of the predictability associated with
large numbers of independent events. This is known as:
Answer specializing.
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127. Multiple Choice: The strategy of investing in several ...
Question The strategy of investing in several assets so that any possible losses are
independent events is referred to as:
128. Multiple Choice: Which of the following are likely to ...
Question Which of the following are likely to be positively correlated?
Answer stock prices of companies that manufacture computers and the cost of shares
in companies that manufacture tires
129. Multiple Choice: Investors in agricultural corporation...
Question Investors in agricultural corporations face many correlated financial risks. Which of
the following are not correlated risks for the agricultural industry?
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130. Multiple Choice: At the end of the 1980s, Lloyd's of L...
Question At the end of the 1980s, Lloyd's of London was in severe financial trouble because
of:
131. Multiple Choice: If events are ________, diversificati...
Question If events are ________, diversification will not reduce risk.
132. Multiple Choice: Which of the following is a limit to ...
Question Which of the following is a limit to the ability of diversification to reduce risk?
133. Multiple Choice: The opportunity to engage in pooling ...
Question The opportunity to engage in pooling shifts the ________ curve of insurance to the
right; insurance companies will take on ________ risk and charge a ________
premium than without pooling.
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134. Multiple Choice: Asymmetric information:
Question Asymmetric information:
135. Multiple Choice: When some people know things that oth...
Question When some people know things that other people don't know, there is ________; it
can ________ economic decisions.
136. Multiple Choice: A life insurance company will often r...
Question A life insurance company will often require a potential customer to submit to a brief
physical exam to assess that person's basic level of health. This practice is a form
of ________ to lessen the problem of ________.
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137. Multiple Choice: The problem of adverse selection:
Question The problem of adverse selection:
138. Multiple Choice: In which of the following situations ...
Question In which of the following situations is adverse selection most likely to be a
problem?
139. Multiple Choice: People faced with adverse selection u...
Question People faced with adverse selection use which of the following strategies to deal
with it?
140. Multiple Choice: Which of the following is a strategy ...
Question Which of the following is a strategy for dealing with the problem of adverse
selection in the labor market?
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141. Multiple Choice: Companies offering life insurance oft...
Question Companies offering life insurance often require a drug test to determine whether the
buyer is a smoker. A smoker then must pay a higher premium. This is an example
of:
142. Multiple Choice: In practice, insurance companies face...
Question In practice, insurance companies faced with adverse selection use which of the
following strategies to deal with it?
143. Multiple Choice: Private information leads ________ to...
Question Private information leads ________ to expect hidden problems in items offered for
sale, leading to ________ prices and to the best items being kept off the market.
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144. Multiple Choice: Rhonda would like to sell her existin...
Question Rhonda would like to sell her existing digital camera to upgrade to a more
sophisticated one by advertising on the bulletin board in the student center. She
decides against it because the used digital cameras listed on the board are
underpriced. This describes the problem of:
145. Multiple Choice: Sellers of used cars may have private...
Question Sellers of used cars may have private information to which buyers are not privy.
This leads to all of the following except:
146. Multiple Choice: Used-car dealers will often advertise...
Question Used-car dealers will often advertise how long they have been in business as a
means of ________ their long-term ________.
147. Multiple Choice: Moral hazard occurs when:
Question Moral hazard occurs when:
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148. Multiple Choice: Many people smoke and continue poor e...
Question Many people smoke and continue poor eating habits because they have health
insurance. This is an example of:
149. Multiple Choice: Moral hazard:
Question Moral hazard:
150. Multiple Choice: Solutions to the problems created by ...
Question Solutions to the problems created by moral hazard include:
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151. Multiple Choice: Insurance companies deal with the pro...
Question Insurance companies deal with the problems created by moral hazard by:
152. Multiple Choice: Health insurance policies include ded...
Question Health insurance policies include deductibles:
153. Multiple Choice: You insure your car against theft. Co...
Question You insure your car against theft. Consequently, you rarely lock the car. This
describes the problem of:
154. Multiple Choice: The premium on insurance is often ___...
Question The premium on insurance is often ________ to the deductible, allowing insurance
companies to ________ their customers.
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155. Multiple Choice: Fire insurance policies include deduc...
Question Fire insurance policies include deductibles:
156. Multiple Choice: Insurance companies attempt to minimi...
Question Insurance companies attempt to minimize moral hazard by imposing:
157. Multiple Choice: McDonald's and other fast-food chains...
Question McDonald's and other fast-food chains rely mainly on franchisees to operate their
own restaurants to avoid the problem of:
158. Multiple Choice: By offering a menu of policies with d...
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Question By offering a menu of policies with different premiums and deductibles, insurance
companies can ________ their customers; for example, a low-risk customer will
often buy insurance with a lower ________ but a higher ________ than a high-risk
customer.
159. Multiple Choice: Scenario: Health CostsAlan is hoping ...
Question Scenario: Health Costs
Alan is hoping for a healthy year, meaning that he would have zero health costs.
Given his habits, there is a 40% chance that Alan will develop a health issue that
will result in $50,000 in health costs. Assume these are the only two conditions
that could exist for Alan in the coming year.
Reference: Ref 20-15
(Scenario: Health Costs) Look at the scenario Health Costs. Given the fact that
Alan has a 40% chance of developing a health problem, what is the expected value
of Alan's health care costs for the coming year?
160. Multiple Choice: Scenario: Health CostsAlan is hoping ...
Question Scenario: Health Costs
Alan is hoping for a healthy year, meaning that he would have zero health costs.
Given his habits, there is a 40% chance that Alan will develop a health issue that
will result in $50,000 in health costs. Assume these are the only two conditions
that could exist for Alan in the coming year.
Reference: Ref 20-15
(Scenario: Health Costs) Look at the scenario Health Costs. Suppose that Alan
decides to change his habits dramatically and as a result decreases the probability
of his developing a health problem such that he now has a 20% chance of
becoming ill. What is the expected value of Alan's health costs now?
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161. Multiple Choice: Scenario: Health CostsAlan is hoping ...
Question Scenario: Health Costs
Alan is hoping for a healthy year, meaning that he would have zero health costs.
Given his habits, there is a 40% chance that Alan will develop a health issue that
will result in $50,000 in health costs. Assume these are the only two conditions
that could exist for Alan in the coming year.
Reference: Ref 20-15
(Scenario: Health Costs) Look at the scenario Health Costs. When Alan's
probability of developing a health problem decreases, holding everything else
constant, Alan's expected value of health care costs:
162. Multiple Choice: If the probability that a person will...
Question If the probability that a person will develop a health problem is greater than that of
another person living in the same community and both buy insurance from the
same provider, most likely the person with a higher probability will pay:
163. Multiple Choice: An individual finds that as his incom...
Question An individual finds that as his income increases, his total utility also increases but
at a decreasing rate. This can be attributed to:
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