Chapter 12 Self-test questions

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An important difference between risk and uncertainty is that

Risk involves danger but uncertainty does not imply danger correct incorrect

With risk, we are able to assign probabilities to an outcome but where we cannot do so, there is uncertainty. correct incorrect

Rewards for risk are always higher than those for uncertainty correct incorrect

None of the above correct incorrect

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A coin toss is regarded as a fair game because

There is an equal chance of drawing a head or tail for each player correct incorrect

The expected value is zero correct incorrect

Both (a) and (b) correct incorrect

The risk is low correct incorrect

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When faced with a decision to make which is uncertain, _______

It's not worth pursuing correct incorrect

We can predict reasonably well which choice is better correct incorrect

It is with the benefit of hindsight or after the event that we can tell which choice was the better one. correct incorrect

Both choices are equally good and we need not be concerned. correct incorrect

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An individual who is indifferent when playing a fair game can be described as:

Risk loving correct incorrect

Risk-neutral correct incorrect

Risk-averse correct incorrect

None of the above correct incorrect

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People who are willing to buy lottery tickets even when they are aware that only a small fraction of the prize money will be paid out are

Risk lovers correct incorrect

Risk-neutral correct incorrect

Risk-averse correct incorrect

Ignorant correct incorrect

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When you win the lottery many times by the same amount, the satisfaction you get from each subsequent increase in income continues to fall because of

Degree of risk correct incorrect

Increasing. costs correct incorrect

Diminishing returns correct incorrect

Diminishing marginal utility of income correct incorrect

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Why will risk-averse individuals still buy insurance which is mathematically unfair?

They are willing to spend money to buy insurance if that will mean lower risks correct incorrect

Because of adverse selection correct incorrect

Because their demand for insurance is horizontal correct incorrect

None of the above correct incorrect

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The proverb; 'don't put all your eggs in one basket' captures the concept of _______ in finance

Financial crisis correct incorrect

Diminishing marginal utility correct incorrect

Portfolio diversification correct incorrect

None of the above correct incorrect

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If Cristiano Ronaldo intends to insure his right foot, the insurance company potentially stands to suffer a major loss if Ronaldo makes a claim. To counter this problem, the insurance company should _______

Refuse to insure the individual always correct incorrect

Undertake risk pooling correct incorrect

Divide the policy into sub-policies and sell them to other firms correct incorrect

Increase the premium correct incorrect

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If a share price moves in the same direction as the market but experiences very limited fluctuations, then the beta is ________

negative correct incorrect

zero correct incorrect

Greater than one correct incorrect

None of the above correct incorrect