Chapter 14 Multiple Choice Quiz

. 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.

. 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.

. 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.

. If a person's utility doubles when their 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.

. 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.

. The coefficient of variation measures

A. the risk per unit of expected payoff.

B. the risk-adjusted expected value.

C. the payoff per unit of risk.

D. a decision maker's risk-return tradeoff.

. A situation in which a decision maker must choose between strategies that have more than one possible outcome when the probability of each outcome is unknown is referred to as

A. diversification.

B. certainty.

C. risk.

D. uncertainty.

. If a decision maker is risk averse, then the best strategy to select is the one that yields the

A. highest expected payoff.

B. lowest coefficient of variation.

C. highest expected utility.

D. lowest standard deviation.

. Circumstances that influence the profitability of a decision are referred to as

A. strategies.

B. a payoff matrix.

C. states of nature.

D. the marginal utility of money.

. The marginal utility of money diminishes for a decision maker who is

A. a risk seeker.

B. risk neutral.

C. a risk averter.

D. in a situation of uncertainty.

. A strategy that yields an expected monetary payoff of zero is called a

A. risk-neutral strategy.

B. fair game.

C. zero-sum game.

D. certainty equivalent.

. A risk-return tradeoff function

A. shows the minimum expected return required to compensate an investor for accepting various levels of risk.

B. slopes upward for a risk averse decision maker.

C. is horizontal for a risk neutral decision maker.

D. All of the above are correct.

. If the market interest rate is 10% and a decision maker's risk adjusted discount rate is 12%, then the decision maker

A. is risk averse.

B. has a certainty-equivalent coefficient that is greater than one.

C. is risk neutral.

D. None of the above is correct.

. Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred

A. is risk averse.

B. has a certainty-equivalent coefficient that is equal to one.

C. is risk neutral.

D. None of the above is correct.

. The analysis of a complex decision situation by constructing a mathematical model of the situation and then performing a large number of iterations in order to determine the probability distribution of outcomes is called

A. sensitivity analysis.

B. expected utility analysis.

C. simulation.

D. a decision tree.

. A payoff matrix presents all the information required to determine the optimal strategy using the

A. expected value criterion.

B. the maximin criterion.

C. the utility maximization criterion.

D. simulation criterion.

. Which of the following is not a way to deal with decision making under uncertainty?

A. Simulation

B. Diversification

C. Acquisition of additional information

D. Application of the maximin criterion

. A matrix that, for each state of nature and strategy, shows the difference between a strategy's payoff and the best strategy's payoff is called

A. a maximin matrix.

B. a minimax regret matrix.

C. a payoff matrix.

D. an expected utility matrix.

. The sequence of possible managerial decisions and their expected outcome under each set of circumstances can be represented and analyzed by using

A. the minimax regret criterion.

B. a decision tree.

C. a payoff matrix.

D. simulation.

. According to a survey carried out by Gitman and Forrester that was published in 1977, the most common way for businesses in the United States to deal with risk in capital budgeting decisions is by

A. ignoring it.

B. using the certainty equivalent method.

C. using the risk-adjusted discount rate method.

D. using the expected utility method.

. A futures contract

A. is a type of bond that specifies the amount of interest that must be paid on a loan at a future point in time.

B. is an agreement to buy or sell a commodity at a specified price at a specified point in time.

C. is a partnership agreement between two parties that determines their future business relationship.

D. None of the above is correct.

. Hedging refers to an investment strategy that is used to

A. control risk from variations in currency prices.

B. prevent losses due to corporate bankruptcies.

C. ensure the highest possible rate of return.

D. prevent foreign competition in domestic capital markets.

. Asymmetric information refers to circumstances in which

A. both parties to a transaction have identical amounts of information.

B. neither party to a transaction has any relevant information.

C. one party to a transaction has more information than the other party.

D. the riskiness of a transaction is greater than its expected return.

. The tendency for low-quality cars to drive high quality cars out of the used car market is an example of

A. hedging.

B. adverse selection.

C. portfolio analysis.

D. moral hazard.

. A person with health insurance is more likely to become ill and visit a doctor than is someone without health insurance. One reason is that a person with health insurance is less likely to take precautions that will prevent illness. This is an example of

A. propinquity.

B. a futures contract.

C. hedging.

D. moral hazard.

. The principal-agent problem may result if

A. a firm is owned and operated by the same person.

B. managers make decisions that are not in the best interest of owners.

C. a firm compensates managers based on the profitability of the firm.

D. All of these answers are correct.

. One way to correct a potential principal-agent problem is for stockholders to

A. offer managers golden parachutes" in the event of a takeover."

B. empower managers to make the decisions they feel are best.

C. ensure that there is no explicit linkage between managers' compensation and the profitability of the firm.

D. All of these answers are correct.

. Which of the following is a sequential, ascending bid auction?

A. Dutch auction

B. First-price sealed bid auction

C. Second-price sealed bid auction

D. English auction

. Which of the following is a descending bid auction?

A. Dutch auction

B. First-price sealed bid auction

C. Second-price sealed bid auction

D. English auction

. The winner's curse refers to

A. the reaction of losers in an English auction to the winner.

B. a tax imposed on the winners of English auctions.

C. paying an amount that exceeds the true value of an item at auction.

D. a Dutch auction in which the winner is obliged, by tradition, to berate the auctioneer.

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