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28 Cards in this Set
- Front
- Back
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A (an) ___________ is defined as a series of wealth or income levels and associated probabilities
a. standard deviation b. expected utility c. risk attitude d. prospect |
d. prospect
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Expected Utility and Prospect Theories are both positive in that they are descriptive.
a. true b. false |
b. false
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According to the CAPM, investors are compensated for taking unsystematic risks.
a. true b. false |
b. false
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_____________ represents that set of portfolios that maximize expected return for a given level of risk.
a. two fund separation b. the efficient frontier c. the efficient markets hypothesis d. the market portfolio |
b. the efficient frontier
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the risk that can be diversified by combining assets in a portfolio is called
a. market risk b. total risk c. firm-specific risk d. standard deviation |
c. firm specific risk
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Taylor sees a lot of movies. He prefers action movies to dramas and comedies to thrillers. he always chooses an action movie over a comedy. Last night he went to the movies and had to choose between two new offerings, a thriller and an action movie. He chose the thriller. is this choice consistent with transitivity of preference?
a. Yes b. No c. Cannot be determined from information provided |
b. No
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Sandi's utility function is u(w)= w^.5. She is considering two prospects P1(.25,$20,$100) and P2(.05, $10,000, 0). Which one would she choose if she maximizes expected utility?
a. prospect 1 b. prospect 2 c. neither d. cannot be determined from information given |
a. prospect 1
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Which of the following statements regarding prospecting theory is true?
a. Certainty is given low weight relative to near-certainty. b. Prospect theory weights are exactly the same as the probabilities used in Expected Utility Theory. c. The weighting function for losses can differ from the weighting function for gains. d. A gains adds more to utility than an equal-sized loss subtracts from it. |
c. The weighting function for losses can differ from the weighting function for gains
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If risky assets are not perfectly positively correlated, portfolio risk is less than the weighted average of the individual risks.
a. true b. false |
a. true
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In a state of uncertainty you know the possible outcomes and you can assign probabilities. In contrast, in a risky situation you can't assign probabilities.
a. true b. false |
b. false
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the tendency to choose an event frequency that matches the percentage of times an event is observed is called
a. the Allais paradox b. Bayes' theorem c. probability matching bias d. framing |
c. probability matching bias
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The joint hypothesis problem refers to the fact that tests of market efficiency have two theories tested at the same time. the two theories are
a. the efficient frontier and two fund separation b. the risk-free asset and the market portfolio, or two fund separation c. the CAPM and Prospect theory d. markets are efficient and a model of returns (like CAPM) |
d. markets are efficient and a model of returns (like CAPM)
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For a person who is ______________, the expected utility of the prospect is less than the utility of expected wealth.
a. risk seeker b. risk neutral c. risk averse d. loss averse |
c. risk averse
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Which of the following is a key precept of Prospect Theory?
a. risk seeking in the gain domain b. transitivity c. risk aversion in the loss domain d. loss aversion |
d. loss aversion
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A financial Market is "efficient" if
a. security prices respond quickly to new information b. no one can consistently earn excess returns c. simulated trading strategies fail to generate significant returns d. all of the above |
d. all of the above
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The reference point if Prospect Theory is the level of wealth.
a. true b. false |
b. false
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___________________ is a method people use to make decision- making manageable. In other words, it helps people organize, evaluate, and keep track of things.
a. loss aversion b. mental accounting c. integration of outcomes d. utility maximization |
b. mental accounting
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For a person who is ___________________, a gain adds less to utility than an equal size loss subtracts from it.
a. risk averse b. risk seeker c. loss averse d. risk neutral |
c. loss averse
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when a risk-free asset is available, investors maximize utility by combining the risk-free asset with the market portfolio. This is referred to as two fund separation.
a. true b. false |
b. false
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In Prospect Theory, low probabilities are given relatively higher weights than more probable events.
a. true b. false |
a. true
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I am offered a bet in which I pay $1 to predict whether a coin toss gives heads or tails. If I predict correctly I get $4 and, If I don't, I lose $1. If am risk averse I will never take this bet.
a. true b. false |
b. false
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For a person who is _________________, the expected utility of the prospect is greater than the utility of expected wealth.
a. loss averse b. risk seeker c. risk neutral d. risk averse |
b. risk seeker
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The Joint hypothesis problem refers to the fact that tests of market efficiency have two theories tested at the same time. The two theories are
a. the risk-free asset and the market portfolio, or two fund separation b. the CAPM and Prospect theory. c. the efficient frontier and two fund separation d. markets are efficient and a model of returns (like CAPM) |
d. markets are efficient and a model of returns (like CAPM)
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In Neoclassical Economics, two key assumptions about preferences are
a. loss aversion and risk aversion b. portfolio diversification and the efficient frontier c. overweighting of low probabilities and risk seeking. d. transitivity and completeness |
d. transitivity and completeness
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Expected Utility and Prospect Theory are both normative theories because they describe behavior.
a. true b. false |
b. false
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______________ is the measure of non-diversifiable risk.
a. beta b. standard deviation c. certainty equivalent d. expected value |
a. beta
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Eugene Fama defined three versions of market efficiency. In the ________________ form, prices reflect all information contained in the historical returns data.
a. strong b. semi-strong c. weak |
c. weak
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Which of the following statements regarding Prospect Theory is false?
a. Certainty is given low weight relative to near-certainty. b. Prospect theory weights are exactly the same as the probabilities used in Expected Utility Theory. c. The weighting function for losses can differ from the weighting function for gains. d. A gains adds more to utility than an equal-sized loss subtracts from it. |
d. A gains adds more to utility than an equal-sized loss subtracts from it.
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