FIN 400 Test 2 with Questions and Answers
Speculation ANSWER Taking considerable risk for a commensurate gain (a positive risk
premium)
Fair Game (Zero Risk Premium) ANSWER Similar to gambling. A risk averse investor will
reject it.
Investors are willing to consider: ANSWER -Risk free assets
-Speculative positions with positive risk premiums
A>0 ANSWER Risk averse. Penalizes risk. Will want larger risk premium for riskier
investments
A=0 ANSWER Risk neutral. Pure trader. Will accept fair game.
A<0 ANSWER Risk lover. Adjusts utility up for risk because they enjoy the risk.
Which direction is preferred on graph ANSWER Northwest. Less risk for higher reward.
Utility Indifference Curve ANSWER Connects all portfolio points with the same utility
value.
How do you estimate risk aversion ANSWER Use questionnaires, observe individuals'
decisions when confronted with risk, observe how much people are willing to pay to avoid
risk.
Speculation ANSWER Taking considerable risk for a commensurate gain (a positive risk
premium)
Fair Game (Zero Risk Premium) ANSWER Similar to gambling. A risk averse investor will
reject it.
Investors are willing to consider: ANSWER -Risk free assets
-Speculative positions with positive risk premiums
A>0 ANSWER Risk averse. Penalizes risk. Will want larger risk premium for riskier
investments
A=0 ANSWER Risk neutral. Pure trader. Will accept fair game.
A<0 ANSWER Risk lover. Adjusts utility up for risk because they enjoy the risk.
Which direction is preferred on graph ANSWER Northwest. Less risk for higher reward.
Utility Indifference Curve ANSWER Connects all portfolio points with the same utility
value.
How do you estimate risk aversion ANSWER Use questionnaires, observe individuals'
decisions when confronted with risk, observe how much people are willing to pay to avoid
risk.
