Given a choice between two investments with the same expected payoff: Answer a. Most people will choose the one with the lower standard deviation b. Most people will opt for the one with the higher standard deviation c. Most people will be indifferent since the expected payoffs are the same d. Most people will calculate the variance to assess the relative risks of the two choices

Given a choice between two investments with the same expected payoff: Answer a. Most people will choose the one with the lower standard deviation b. Most people will opt for the one with the higher standard deviation c. Most people will be indifferent since the expected payoffs are the same d. Most people will calculate the variance to assess the relative risks of the two choices

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 2MC

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Given a choice between two investments with the same expected payoff: a. Most people will choose the one with the lower standard deviation b. Most people will opt for the one with the higher standard deviation c. Most people will be indifferent since the expected payoffs are the same d. Most people will calculate the variance to assess the relative risks of the two choices
Suppose there are n assets which are uncorrelated. (They mightbe n different “wild cat” oil well prospects.) You may invest in any one, or in any combination of them. The mean rate of return r¯ is the same for each asset, but the variances are different. The return on asset i has a variance of σ2i for i = 1, 2, . . . , n.(a) Show the situation on an r¯-σ diagram. Describe the efficient set.(b) Find the minimum-variance point. Express your result in terms of σ¯2 =!"ni=11σ2i#−1.
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond, and the third is a T-bill money market fund that yields a rate of 8%. The mean and the standard deviation of the risky funds is as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is 0.10. Your client’s degree of risk aversion is A = 3.5. Given the utility function: U = E(r) - 1/2 A Sigma^2 What proportion, y, of the total investment should be invested in the tangency portfolio so that your client can maximize his/her expected utility? What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?
An investor considers investing $17,000 in the stock market. He believes that the probability is 0.22 that the economy will improve, 0.42 that it will stay the same, and 0.36 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $23,000, but it can also go down to $11,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $17,000. What is the expected value of his investment?
An individual has a utility function U(W)= √w. where W is the level of wealth.They have been offered a gamble with a payout of 100 with a probability of 0.31 and a payout of ￡35 with a probabiity of 1-031.The Certainty Equivalent of this gamble is:
Anticipated consumer demand in a restaurant for free-range steaks next month can be modeled by a normal random variable with mean 1,200 pounds and standard deviation 100 pounds. a. What is the probability that demand will be between 1,100 and 1,300 pounds? Calculate in 4 decimal place. b. The probability is 0.10 that demand will be more than how many pounds?
The time taken to complete a bicycle race is normally distributed, with anaverage time (μ) of 2.25 hours and a standard deviation (σ) of 0.65 hours.What is the probability that a randomly selected cyclist will: Q.7.3.1 Take between 2.75 and 3.15 hours to complete the race? Interpretyour answer. Q.7.3.2 Take between 2.05 and 2.15 hours to complete the race? Interpretyour answer.
Suppose that there are two types of workers: high and low. Employers cannot distinguish between different types during an interview. Employers value high type at $200,000 and low type at $100,000. Employers are in a competitive market (i.e. zero profit applies). High type workers have a reservation wage of 140,000 and low type workers have a reservation wage of 80,000. Suppose that 50% of all workers are high type. The productivities, reservation wages, and the probabilities are common knowledge). What wage would the employers offer? Please explain the solution!
The accompanying table gives the outcomes and probability distribution of the number of times a student checks her e-mail daily: Outcome (X) (number of email checks) Probability Distribution f(x) 0 0.05 1 0.15 2 0.30 3 0.25 4 0.15 5 0.08 6 0.02 Calculate the expected value and the variance.
A large number of MBA applicants are given an aptitude test. Scores are normally distributed with a mean of 460 and standard deviation of 80. What is the probability a randomly chosen applicant scores 600 or above in this test? a. 0.5401 b. 0.0401 c. 0.4599 d. 0.0852
"Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $1,480,000, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office.The probability of a small box office earning $203,000 is 0.27. The probability of a medium box office of $1,660,000 is 0.49, and the probability of a large box office of $2,950,000 is 0.24.Jay can send his novel to a prominent movie critic to assess the potential box office success. It will cost $20,000 to get the novel evaluated by the movie critic.The movie critic can have either a favorable or unfavorable opinion. The movie critic's reliability of predicting box office success is as follows.If the movie will have a large box office, there is a 0.75 probability the critic will have a favorable opinion.If the movie will have a medium…
"Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $1,460,000, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office.The probability of a small box office earning $210,000 is 0.27. The probability of a medium box office of $1,530,000 is 0.64, and the probability of a large box office of $3,190,000 is 0.09.Jay can send his novel to a prominent movie critic to assess the potential box office success. It will cost $21,000 to get the novel evaluated by the movie critic.The movie critic can have either a favorable or unfavorable opinion. The movie critic's reliability of predicting box office success is as follows.If the movie will have a large box office, there is a 0.61 probability the critic will have a favorable opinion.If the movie will have a medium…