2009final - PART A: Answer all questions. Each question is...

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PART A: Answer all questions . Each question is worth 10 marks. 1. You are writing an online quiz consisting of multiple choice questions where you must choose the best answer from 4 choices. You make an initial selection by clicking on an incorrect responses (di/erent from your own selection) is revealed to be incorrect. Note that it is always an incorrect response and always di/erent from your own selection. You are then provided with the option to change your response. Suppose that you arrive at a question which you know nothing about (you skipped that class) and you place an equal (prior) probability, p = 1 4 on any of the answers ( a through d ) being correct. You initially choose a as your answer. The online quiz reveals that b is one of the incorrect answers and o/ers you the opportunity to switch your answer (to c or d ) or keep your answer at a . Compare the probability of answering the question correctly if you keep your answer at a or switch to either c or d . 1
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s and a bonus, b s + b is only paid to the manager if the manager achieves a particular performance target. If the manager exerts normal e/ort, the probability of achieving the performance target is 1 4 . If the manager exerts high e/ort, the probability of achieving the performance target is 2 3 . The manager views extra e/ort (increasing e/ort from normal to high) as costly since it requires the manager to work long hours. The manager requires an extra $125 ; 000 in compensation to be willing to exert high e/ort. Write out the the manager to exert high e/ort. Determine the smallest value of b that will induce the manager to exert high e/ort. 2
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3. A Broker observes the performance characteristics of a stock (strong or weak) and makes a recommendation of Buy or Sell to a Client (unable to observe the performance characteristics). The payo/s to the Broker are partially aligned with the Client and can be represented in the following manner: Stock Prospects strong weak Client Buy 1 1 Action Sell 1 1
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This document was uploaded on 05/11/2011.

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2009final - PART A: Answer all questions. Each question is...

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