Practice Exam 4

Practice Exam 4 - 1 Suppose that increased risk of mortgage...

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1. Suppose that increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see a. the demand for bank stocks rise, which would raise the prices of bank stocks. b. the demand for bank stocks rise, which would reduce the prices of bank stocks. c. the demand for bank stocks fall, which would raise the prices of bank stocks. d. the demand for bank stocks fall, which would reduce the prices of bank stocks. 2. If the efficient market hypothesis is correct, then a. index funds should typically beat managed funds, and usually do. b. index fund should typically beat managed funds, but usually do not. c. mutual funds should typically beat index funds, and usually do. d. mutual funds should typically bet index funds, but usually do not. 3. A risk-averse person has a. a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. b. a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. c. a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. d. a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth. 4. Marcus puts a greater proportion of his portfolio into government bonds. Marcus’s action a. increases both risk and the expected rate of return. b. decreases both risk and the expected rate of return. c. increases risk, but decreases the expected rate of return. d. decreases risk, but increases the expected rate of return. 5. Insurance companies confront the _____ problem before they agree to insure a client and the _____ problem after the policy is in place. a. moral hazard; adverse selection b. principle-agent; moral hazard c. adverse selection; principle-agent d. adverse selection; moral hazard 6. If Julieanne is risk-averse, then she will always a. choose not to play a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100. b. choose not to play a game where she has a 75 percent chance of winning $100 and a 25 percent chance of losing $100. c. choose to play a game where she has a 52 percent chance of winning $100 and a 48 percent chance of losing $100. d. All of the above are correct. 7.
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This note was uploaded on 10/23/2011 for the course ECON 252 taught by Professor Robertholand during the Fall '08 term at Purdue.

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Practice Exam 4 - 1 Suppose that increased risk of mortgage...

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