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Unformatted text preview: CHAPTER 16—RISK ANALYSIS MULTIPLE CHOICE 1. Economic risk is a situation where: a. only outcome possibilities are not known. b. only outcome probabilities are not known. c. neither outcome possibilities nor outcome probabilities are known. d. none of these. ANS: C 2. The chance of loss associated with a given managerial decision is: a. market risk. b. inflation risk. c. credit risk. d. business risk. ANS: D 3. The difficulty of selling corporate assets at favorable prices under typical market conditions is: a. derivative risk. b. cultural risk. c. liquidity risk. d. currency risk. ANS: C 4. Following an increase in the riskfree rate, the certainty equivalent adjustment factor α will: a. rise for risk adverse investors. b. fall for risk adverse investors. c. fall for risk seeking investors. d. none of these. ANS: D 5. The minimum expected opportunity loss associated with a decision equals the: a. worst outcome under the best case scenario. b. cost of uncertainty. c. incremental cost. d. best outcome under the worst case scenario. ANS: B 6. A decision standard that selects the alternative with the best of the worst possible outcomes is: a. game theory. b. the maximin criterion. c. the minimax criterion. d. sensitivity analysis. ANS: B 7. Economic risk is the: a. variance of total profit. b. standard deviation of total profit. c. coefficient of variation for total profit. d. chance of loss. ANS: D 8. A probability distribution for total profit is a list of: a. possible events. b. probabilities. c. possible events and probabilities. d. occurrences. ANS: C 9. A project with a 75% chance of earning $4,000 in profit and a 25% chance of earning $12,000 in profit has an expected value of: a. $8,000 b. $10,000 c. $16,000 d. $6,000 ANS: D 10. A project with a 50% chance of earning $0 and a 50% chance of earning $100 has a standard deviation of: a. $100 b. $50 c. $75 d. $0 ANS: B 11. For two projects of differing sizes, the project that is less risky has the: a. highest standard deviation. b. highest coefficient of variation. c. lowest coefficient of variation. d. highest expected profit. ANS: C 12. If profits are normally distributed with a mean of $12 and a standard deviation of $4, there is a 50/50 chance actual profits will exceed: a. $12 b. $8 c. $16 d. $4 ANS: A 13. Risk neutrality implies a(n): a. constant marginal utility of income. b. diminishing marginal utility of income. c. increasing marginal utility of income. d. constant utility of income. ANS: A 14. For a risk seeker the marginal utility of money is: a. constant. b. increasing. c. positive. d. diminishing. ANS: B 15. A certaintyequivalent adjustment factor α = 0.8 is consistent with risk: a. neutrality....
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This note was uploaded on 03/08/2011 for the course ECONABA 635 taught by Professor Leiter during the Summer '10 term at Andrew Jackson.
 Summer '10
 LEITER

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