Chapter 14 True or False Quiz

. When there is only one possible outcome to a decision, risk or uncertainty is present.

. Risk refers to a situation in which the probability of each possible outcome to a decision is unknown or meaningless.

. A payoff matrix shows the profit that would be earned under certainty, risk, and uncertainty so the decision maker can choose which is best.

. Decisions made under risk require a decision maker to choose both a strategy and a state of nature.

. A list of all possible states of nature and their probabilities is referred to as a probability distribution.

. If the probability that the economy will be in recession is 0.40, then the probability that the economy will not be in a recession must be 0.60.

. The expected profit of a strategy is equal to the level of profit realized from the outcome with the highest level of probability.

. The expected value of a strategy is a measure of risk.

. The normal probability distribution is an example of a discrete probability distribution.

. The Z value for a particular outcome is equal to the difference between the outcome and the expected outcome measured in terms of standard deviations.

. Z values cannot be negative or zero.

. All normal distributions have a mean equal to zero.

. If a person's total utility more than doubles when their wealth doubles, then that person is a risk averter.

. The expected value of a fair game is zero.

. If a person is risk averse, then they will only play games that have an expected value that is negative.

. A lower risk-adjusted discount rate should be used to evaluate an investment project that involves a higher level of risk.

. The riskier a project is, the smaller its certainty equivalent will be.

. A certainty equivalent coefficient of one is used if the decision maker is risk neutral.

. A decision tree shows a sequence of decisions and their outcomes under all states of nature.

. Branches coming out of circles on decision trees show alternative courses of action that can be selected by decision makers.

. Test marketing is an example of simulation.

. The maximin criterion is a method of dealing with uncertainty.

. The maximin criterion is applied by first selecting the best outcome from each strategy and then identifying the strategy that has the lowest of the best outcomes.

. The maximin and minimax regret criteria always lead to the same conclusion, but they identify it using different methods.

. In general, uncertainty can be eliminated by gathering additional information.

. Diversification provides a way of reducing risk and uncertainty.

. Investments in foreign-currency-denominated assets can be hedged by using the forward market in currencies.

. Hedging refers to the practice of making foreign investments.

. Hedging eliminates all risks associated with foreign investments.

. A forward contract is an agreement to purchase or sell at a price specified today for delivery at a future date.

. The principal-agent problem applies to the relationship between managers (the principals) and stockholders (the agents).

. Golden parachutes can overcome the principal-agent problem.

. The principal-agent problem exists because decision-makers and owners may have different goals.

. An auction is a market in which potential sellers compete to sell their products.

. An English auction is a sequential, ascending-bid auction.

Back to top