Suppose you have just inherited $10,400 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return? O A. Put the money in an interest-bearing checking account, which eams 3%. The FDIC insures the account against bank failure. O B. Invest the money in a corporate bond, with a stated return of 6%, but there is a chance of 11% the company could go bankrupt. OC. Loan the money to one of your friends' roommates, Mike, at an agreed upon interest rate of 9%, but you believe there is a 6% chance that Mike will leave town without repaying you. O D. Hold the money in cash and eam zero return. Suppose the only possibility is to loan the money to one of your friends' roommates. If you could pay your friend $50 to find out extra information about Mike that would indicate with certainty whether he will leave town without paying or not, would you pay the $507? O A. Yes, it is worth it, but only if Mike stays in town and pays back the loan. O B. Yes, it is worth it, because it increases your expected return and reduces the downside risk that the loan will default. OC. No, it isn't worth it, because the money paid to your friend increases your costs and it cuts your expected return. O D. No, it isn't worth it, because it doesn't change your expected return and keeps the downside risk at the same level. What does the previous answer say about the value of better information regarding risk? OA. Paying a small amount to get better information regarding risk doesn't bring benefits. O B. A problem created by asymmetric information can't be solved with money. OC. Paying a small amount of money is inefficient in cases of moral hazard. O D. Paying a small amount to improve risk assessment can be very beneficial.
Suppose you have just inherited $10,400 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return? O A. Put the money in an interest-bearing checking account, which eams 3%. The FDIC insures the account against bank failure. O B. Invest the money in a corporate bond, with a stated return of 6%, but there is a chance of 11% the company could go bankrupt. OC. Loan the money to one of your friends' roommates, Mike, at an agreed upon interest rate of 9%, but you believe there is a 6% chance that Mike will leave town without repaying you. O D. Hold the money in cash and eam zero return. Suppose the only possibility is to loan the money to one of your friends' roommates. If you could pay your friend $50 to find out extra information about Mike that would indicate with certainty whether he will leave town without paying or not, would you pay the $507? O A. Yes, it is worth it, but only if Mike stays in town and pays back the loan. O B. Yes, it is worth it, because it increases your expected return and reduces the downside risk that the loan will default. OC. No, it isn't worth it, because the money paid to your friend increases your costs and it cuts your expected return. O D. No, it isn't worth it, because it doesn't change your expected return and keeps the downside risk at the same level. What does the previous answer say about the value of better information regarding risk? OA. Paying a small amount to get better information regarding risk doesn't bring benefits. O B. A problem created by asymmetric information can't be solved with money. OC. Paying a small amount of money is inefficient in cases of moral hazard. O D. Paying a small amount to improve risk assessment can be very beneficial.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose you have just inherited $10,400 and are considering different options for investing the money to maximize your return.
If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize
your expected return?
O A. Put the money in an interest-bearing checking account, which eams 3%. The FDIC insures the account against bank failure.
O B. Invest the money in a corporate bond, with a stated return of 6%, but there is a chance of 11% the company could go
bankrupt.
O. Loan the money to one of your friends' roommates, Mike, at an agreed upon interest rate of 9%, but you believe there is a
6% chance that Mike will leave town without repaying you.
D. Hold the money in cash and eam zero return.
Suppose the only possibility is to loan the money to one of your friends' roommates. If you could pay your friend $50 to find out extra
information about Mike that would indicate with certainty whether he will leave town without paying or not, would you pay the $50?
O A. Yes, it is worth it, but only if Mike stays in town and pays back the loan.
O B. Yes, it is worth it, because it increases your expected return and reduces the downside risk that the loan will default.
OC. No, it isn't worth it, because the money paid to your friend increases your costs and it cuts your expected return.
OD. No, it isn't worth it, because it doesn't change your expected return and keeps the downside risk at the same level.
What does the previous answer say about the value of better information regarding risk?
O A. Paying a small amount to get better information regarding risk doesn't bring benefits.
O B. A problem created by asymmetric information can't be solved with money.
OC. Paying a small amount of money is inefficient in cases of moral hazard.
O D. Paying a small amount to improve risk assessment can be very beneficial.
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